What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-02-26 compared with 2020-02-24 · 412 added, 360 removed, 312 unchanged (71% of the section changed)

Management's Discussion and Analysis of Financial Condition and Results of Operations.

Forward-looking statements are made based on management's current expectations and beliefs relating to future developments and their potential effects upon Shake Shack Inc.

and its subsidiaries.

There can be no assurance that future developments affecting Shake Shack and its subsidiaries will be those anticipated by management.

These forward-looking statements are not a guarantee of future performance and involve risks and uncertainties that may cause actual results to differ materially from those discussed in the forward-looking statements.

This section and other parts of this Annual Report on Form 10-K (“Form 10-K”) contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995 ("PSLRA"), which are subject to known and unknown risks, uncertainties and other important factors that may cause actual results to be materially different from the statements made herein.

All statements other than statements of historical fact are forward-looking statements.

Forward-looking statements discuss our current expectations and projections relating to our financial position, results of operations, plans, objectives, future performance and business.

You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts.

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

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

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

You should evaluate all forward-looking statements made in this Form 10-K in the context of the risks and uncertainties disclosed in Part I, Item 1A of this Form 10-K under the heading "Risk Factors" and in this Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations".

The forward-looking statements included in this Form 10-K are made only as of the date hereof.

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If we do update one or more forward-looking statements, no inference should be made that we will make additional updates with respect to those or other forward-looking statements.

Shake Shack is a modern day "roadside" burger stand serving a classic American menu of premium burgers, hot dogs, crispy chicken, crinkle cut fries, shakes, frozen custard, beer and wine.

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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.

Our fine dining heritage and commitment to community building, hospitality and the sourcing of premium ingredients is what we call "fine casual." Fine casual couples the ease, value and convenience of fast casual concepts with the high standards of excellence grounded in our fine dining heritage — thoughtful ingredient sourcing and preparation, hospitality and quality.

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This commitment drives our integration into the local communities in which we operate and fosters a deep and lasting connection with our guests.

FISCAL 2019 HIGHLIGHTS

Fiscal 2019 was another strong year for Shake Shack in which we continued to execute upon our growth strategy by opening a record-breaking number of domestic company-operated Shacks, further expanded our licensed business both internationally and domestic, enhanced our infrastructure and support systems and kept focus on our digital strategy, specifically in rolling out our delivery partnership.

We met our targeted growth plan and opened 39 domestic company-operated Shacks and we entered into the new markets of New Orleans, Salt Lake City and Columbus, as well as deepened our roots in our current markets across the country .

Internationally, we expanded our footprint by opening 24 new licensed Shacks, which included our first Shack openings in Shanghai, Mexico City, Singapore and Manila.

Additionally, we opened 10 domestic licensed Shacks, further supporting our licensed growth strategy with eight of those openings in airports across the country.

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We further executed upon our commitment of putting our people first.

To foster an inclusive and diverse work environment, we launched our All-In initiative across the entire organization.

The All-In program works to provide equal opportunities for success, removing obstacles and fostering a culture of diversity, inclusion and empowerment.

This program included a number of new initiatives, including a mentorship program, flexible work arrangement policy and the pilot of our 4-day workweek for Shack managers.

We were proud to be named one of the "Best places to work for LGBTQ+ Equality" and earn a 100% score on the Human Rights Campaign's Corporate Equality Index for our support of the LGBTQ+ community in the workplace.

We continued to innovate our menu throughout fiscal 2019 with exciting promotions and events, chef collaborations, LTOs and limited launches from our Innovation Kitchen.

One of the biggest promotions we ran was i n honor of the final season of Game of Throne where we launched our limited-edition #ForTheThrone menu.

This promotion included our icy Dragonglass Shake and our Dracarys Burger, as well as offering limited edition shake cups at Shacks nationwide.

We also featured a different shake each month throughout the year as well as a variety of lemonades.

Additionally, we launched Chick'n Bites as an LTO and have since added to the core menu.

For the past couple of years we have participated in various delivery pilots with a number of partners.

In 2019 we announced our national integrated partnership with Grub hub.

We believe our partnership allows us to provide faster delivery, fresher food and a winning guest experience.

We will also have access to enhanced tools to analyze performance and ordering trends to be able to connect with guests in new and more personalized ways, as well as engage in joint marketing initiatives that we believe will generate connections with new guests and drive order frequency for existing fans.

We also ran our #SHACKUP campaign throughout the year in celebration of our new delivery partnership.

This campaign featured an elevated Shake Shack experience highlighting key delivery moments, such as treat yourself, family dinner, date night, celebrating with friends and ordering for the office team.

To support our growth and rapid expansion we needed to enhance our infrastructure and support systems.

We completed the first phase of our enterprise-wide system upgrade initiative, Project Concrete, in June 2019.

In an effort to ensure our infrastructure and support systems are sufficiently robust and scalable to deliver upon our current and anticipated future growth opportunities, we made key investments in our core financial and operational systems, which included those supporting our finance, procure-to-pay, inventory and human capital management areas.

Our success in these growth strategies resonated through our fiscal 2019 results.

Some financial highlights for fiscal 2019 include:

Total revenue increase d 29.4% to $594.5 million .

Shack sales increase d 29.0% to $574.6 million .

Same-Shack sales increased 1.3% .

Licensed revenue increase d 45.0% to $ 19.9 million .

Shack system-wide sales increased 33.2% to $895.3 million .

Operating income was $25.7 million , or 4.3% of total revenue, which included the impact of costs associated with Project Concrete and other one-time items totaling $ 2.4 million .

Shack-level operating profit*, a non-GAAP measure, increase d 13.4% to $128.0 million , or 22.3% of Shack sales.

Net income was $24.1 million and net income attributable to Shake Shack Inc.

was $19.8 million , or $0.61 per diluted share.

Adjusted EBITDA*, a non-GAAP measure, increase d 10.8% to $81.8 million .

Adjusted pro forma net income *, a non-GAAP measure, increase d 1.7% to $27.4 million , or $0.72 per fully exchanged and diluted share.

73 system-wide Shack openings, including 39 domestic company-operated Shacks and 34 licensed Shacks.

Six licensed Shack closures, which included four closures in Russia.

System-wide Shack count net increase of 32.2% .

* Shack-level operating profit, adjusted EBITDA and adjusted pro forma net income are non-GAAP measures.

Reconciliations of Shack-level operating profit to operating income, adjusted EBITDA to net income (loss) attributable to Shake Shack Inc., and adjusted pro forma net income to net income (loss) attributable to Shake Shack Inc., the most directly comparable financial measures presented in accordance with GAAP, are set forth on pages 66–70.

TRENDS IN OUR BUSINESS

In fiscal 2019 we continued to focus on driving long-term value creation and carried out our Stand For Something Good Mission by:

putting our people first, creating a winning guest experience, engaging the community and operating with purpose.

Recent Development and Trends

We experienced steady recovery in the business during the fourth quarter of 2020, 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.

The virus has impacted all global economies, and particularly in the United States, it has resulted 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, where permitted, under modified operations to meet public health guidelines and evolving customer behaviors and expectations.

Same-Shack sales improved across all regions on a sequential basis in the fourth quarter 2020 when compared to the third quarter 2020, with performance driven by increases in in-Shack dining in both urban and suburban Shacks, combined with high levels of digital sales.

Most notably, same-Shack sales improved sequentially in each of the last nine months of fiscal 2020, and through fiscal January 2021.

During the fourth quarter of fiscal 2020, same-Shack sales were down 17.4% compared to the same period last year, with urban Shacks down 31% and suburban Shacks approximately flat compared to the same period last year.

Similar to prior years, in mid-December we increased menu prices approximately 2% on average across all Company-operated Shacks.

Our fourth quarter 2020 same-Shack sales reflect sequential improvement from the prior quarter, during which same-Shack sales were down 31.7%, with urban Shacks down 43% and suburban Shacks down 16%.

Subsequent to the fourth quarter of 2020, in fiscal January 2021, same-Shack sales were down 5%, with urban Shacks down 17% and suburban Shacks up 8% compared to the same period last year.

In the beginning of fiscal February 2021, trends were impacted by cold weather and snowstorms across many parts of the country, causing more than 130 full or partial lost operating days from Shack closures.

Through the first three weeks of fiscal February 2021, same-Shack sales were down 16%, with urban Shacks down 27% and suburban Shacks down 4% compared to the same period last year.

As expected, urban locations are still acutely impacted by the pandemic and suburban locations are recovering to pre-COVID sales levels quicker.

New York City, particularly Manhattan, continues to lag other regions and we expect this to be an ongoing trend until offices return and business and tourism traffic fully recovers.

Two domestic Company-operated Shacks were temporarily closed as of the end of the fourth quarter 2020.

Furthermore, as of the end of the fourth quarter 2020, approximately half 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.

During the fourth quarter of 2020, total digital sales, including orders placed on the Shake Shack app, website and third party delivery platforms, represented 59% of total Shack sales, with this trend continuing through the start of fiscal 2021, with digital sales mix at 64% in fiscal January 2021 and 63% during the first three weeks of fiscal February 2021.

In fiscal 2021, through the first three weeks of fiscal February 2021, Company-owned app and web sales increased approximately 300% compared to the same period in the prior year.

Furthermore, we added over 2 million first-time purchasers to our Company-owned app and web channels between mid-March 2020 and the end of fiscal January 2021.

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We plan to continue to expand our business, drive Shack sales and enhance our competitive positioning by executing on the following strategies:

(i) opening new domestic company-operated Shacks;

(ii) growing our licensed Shack business, both domestically and abroad;

(iii) expanding and enhancing our guest experience;

and (iv) capitalizing on our outsized brand awareness.

Our primary means of growth continues to be opening new domestic company-operated Shacks, increasing our footprint in our existing markets as well as expanding into a select number of new ones.

We continue to broaden our Shack formats to suit our new and existing markets, such formats include free-standing pads, airports, events, food trucks, digital focused, urban, stadium, shopping center, mall, food court and roadside.

Our development strategy in fiscal 2020 focuses on further penetration of existing markets, complemented by launches in some new markets, including Indianapolis and Sacramento.

As we continue to grow, especially outside of New York City and other urban markets, we expect our company-wide average unit volume ("AUV") for all domestic company-operated Shacks to continue to decline over time as Shacks of various unit volumes are introduced into the system.

Our historical AUVs have been higher, due in large part to our concentration in New York City and urban markets, and as such, historical domestic company-operated AUVs are not a good measure of expected sales at new Shacks.

For fiscal 2020, we expect domestic company-operated AUV to be between $3.7 to $3.8 million .

We continue to devote attention to expanding our licensed business, both internationally and domestically, which we executed this year with 24 international licensed Shack and 10 domestic licensed Shack openings.

We opened Shacks in four additional countries throughout the year, including:

three Shacks in mainland China, two Shacks in the Philippines, two Shacks in Mexico and one Shack in Singapore.

A meaningful part of our international business strategy remains focused in Asia.

To further foster our growth in Asia, we opened our first international office in Hong Kong in 2019 to support the brand and day-to-day operations.

Domestically, we have continued to grow our licensed business, especially in our presence at airport locations around the country, which have been an exciting layer of growth to our licensed strategy.

Of the 10 domestic licensed locations we opened in 2019, eight were in airports across the country.

For further details around financial information about geographic areas, see Note 20 to the consolidated financial statements included in Part II, Item 8.

We remain focused on expanding and enhancing our guest experience, which we strive to do so through the community gathering places we create, menu innovation and the digital space.

We plan to execute on this strategy by:

Continuing to expand our Shacks through a variety of formats and gaining market share.

Though our base is heavily weighted toward free-standing pads, and we plan on building many more of those, we are also looking to expand our footprint with our other formats, including:

airports, events, food trucks, digital focused, urban, stadium, shopping center, mall, food court and roadside.

Creating buzz-worthy LTOs, innovating our core menu and looking towards new menu categories in fiscal 2020, which includes bringing back some guest favorites like the ShackMeister Burger and Hot Chick'n, as well as adding Hot Chick'n Bites.

We will continue to use our Innovation Kitchen in New York and regionally around the country and globe to collaborate with chefs and test new items.

We will continue to evolve our digital strategy by providing the best app, kiosk and delivery experiences.

As part of our digital expansion, we are working to redesign the full web experience, which encompasses everything from ordering on the app or your desktop, at the Shack or via Grubhub.

The first phase of our enterprise-wide systems upgrade initiative, Project Concrete, was completed in June 2019 and we plan on continuing the next phase in fiscal 2020.

Given our expected growth of between 40 to 42 Shacks to open in fiscal 2020, and digital expansion over the past year, we recognize that it is essential for our infrastructure and support systems to be sufficiently robust and scalable to deliver upon our anticipated future growth opportunities.

We will be focusing on our operational and back-office systems during this phase of the initiative and continuing in making those key investments necessary to reduce the administrative tasks in the Shacks.

While we believe there are significant opportunities ahead of us, we also face many challenges, along with our industry, particularly around labor and related expenses, our digital expansion and geopolitical factors .

We expect the high labor cost trends to continue into fiscal 2020, as we have seen for the last couple of years.

We believe that rising minimum wage legislation and a competitive and low unemployment labor market will continue to affect the restaurant industry and with significant mandatory increases in both minimum wages and salaries in many of our key markets.

Additionally, we have seen increased regulatory pressures, such as the Fair Workweek legislation in New York City, with similar legislation proposed in other jurisdictions as well, including Philadelphia and Chicago in fiscal 2020.

Several states in which we operate have enacted minimum wage increases and it is possible that other states or the federal government could also enact minimum

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

Fiscal 2020 Fiscal 2021

Quarter Second

Quarter Third

Quarter Fourth

Quarter First

(dollar amounts in thousands) Mar 25 Apr 22 May 20 Jun 24 Jul 22 Aug 19 Sep 23 Oct 21 Nov 18 Dec 30 (1)

Jan 27 Feb 17 (2)

Average weekly sales (3)

$56 $32 $50 $52 $56 $59 $61 $62 $62 $62 $63 $60

Total year-over-year sales growth (decline) (11)% (56)% (32)% (32)% (23)% (20)% (10)% (5)% (3)% 18% (6)% (2)%

Same-Shack sales % (4)

(29)% (64)% (42)% (42)% (39)% (34)% (23)% (21)% (17)% (15)% (5)% (16)%

(1) When excluding the impact of the 53rd week, total year-over-year sales were down 1%.

(2) Represents the first three weeks of fiscal February 2021.

(3) 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.

(4) "Same-Shack sales" or “SSS” represents Shack sales for the comparable Shack base, which is defined as the number of domestic Company-operated Shacks open for 24 full fiscal months or longer.

For days that Shacks were temporarily closed, the comparative 2019 period was also adjusted.

For fiscal December, same-Shack sales excludes the impact of the sixth week and compares the five weeks from November 19, 2020 through December 23, 2020 to the five weeks from November 21, 2019 through December 25, 2019.

Average weekly sales were $62,000 in the fourth quarter 2020, a 6.9% increase compared to the third quarter 2020.

This improvement is in addition to typically lower seasonal average weekly sales during the fourth quarter of any given year, and it continued through fiscal January 2021 with average weekly sales of $63,000.

During the first three weeks of fiscal February 2021 average weekly sales were $60,000, reflecting the impact of cold weather and snowstorms, which affected nearly all regions.

Our licensed business has shown overall steady recovery, as noted herein, however the business does continue to be impacted by the pandemic.

Our domestic licensed business still faces significant headwinds, with airport and stadium Shacks still either closed or at significantly reduced traffic.

As of the end of fiscal 2020, 17 licensed Shacks remained temporarily closed.

Furthermore, approximately half of our UK Shacks were closed as of the end of fiscal 2020, as the government maintained lockdowns to control the virus spread.

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

Fiscal 2020 Fiscal 2021

Quarter Second

Quarter Third

Quarter Fourth

Quarter First

(dollar amounts in millions) Mar 25 Apr 22 May 20 Jun 24 Jul 22 Aug 19 Sep 23 Oct 21 Nov 18 Dec 30 (1)

Jan 27 Feb 17 (2)

Weekly licensed sales (3)

$ 4.6 $ 2.0 $ 2.4 $ 3.5 $ 4.6 $ 5.4 $ 5.7 $ 5.9 $ 5.9 $ 6.4 $ 5.6 $ 6.0

Total year-over-year licensed sales growth (decline) 13 % (65) % (58) % (47) % (32) % (23) % (9) % (10) % (10) % 4 % (27) % (7) %

Number of open licensed Shacks 96 56 59 91 98 104 105 107 106 106 107 108

(1) When excluding the impact of the 53rd week, total year-over-year licensed sales were down 15%.

(2) Represents the first three weeks of fiscal February 2021.

(3) 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.

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wage increases.

Our primary challenge for fiscal 2020 and the next few years will be preserving our margins in the face of these rising labor costs.

As more minimum wage increases are enacted, we may be required to implement additional pay increases or offer additional benefits in the future in order to attract and retain the most qualified people, which we expect to put further pressure on our operating margins.

In addition to recruiting the most qualified people, we are committed to retaining our employees and will continue to evolve training, compensation and benefits to do so, for example, by extending our equity-based compensation program to general managers.

As we have described throughout our growth strategies, the digital space is a key area of focus for us and we are continuing to evolve in it.

Digital touches upon almost every aspect of our guest experience, so it is crucial for us to understand our guest behaviors and remain competitive in the industry.

For example, our delivery partnership with Grubhub was launched in 2019 and will take some time for us to evaluate and apply the insights we will learn through the guest data we retrieve.

In fiscal 2019 we further expanded internationally by opening our first Shacks in mainland China, Hong Kong, Singapore, the Philippines and Mexico.

As with any international Shack, there remains risk due to political and economicl uncertainties.

Specifically, due to the geopolitical factors in Hong Kong, we expect to see some impact due to closures from time to time.

Additionally, with the onset of the coronavirus outbreak in China and the World Health Organization's declaration of its global health emergency, we would also expect to see lower traffic in the impacted areas and potentially beyond.

We expect our operating profit to increase in absolute terms and our margin to begin to stabilize in 2020 compared to the contraction seen over the past few years.

With 275 Shacks system-wide as of December 25, 2019 , we remain excited for the new opportunities ahead of us, both domestically and abroad.

Despite the challenges we face, we believe that we are positioned well for future growth.

Development Highlights

During fiscal 2020, we opened 20 new domestic Company-operated Shacks and 16 net new licensed Shacks.

During fiscal 2021, we expect to open between 35 to 40 new domestic Company-operated Shacks and 15 to 20 new licensed Shacks.

Below are Shacks opened during the fourth quarter of 2020.

Location Type Opening Date

Singapore — Suntec City International Licensed September 30

Murray, UT — Fashion Place Domestic Company-Operated October 1

Madison, WI — Hilldale Center Domestic Company-Operated October 5

Abu Dhabi, UAE — Dalma Mall International Licensed October 5

Pasadena, CA — Pasadena Domestic Company-Operated October 12

White Plains, NY — The Westchester Domestic Company-Operated October 26

Makati, Philippines — Greenbelt, Legazpi Village International Licensed October 29

Mexico City, Mexico — Terraza Coapa International Licensed November 5

Houston, TX — The Woodlands Domestic Company-Operated November 19

South Korea — Daejeon Dunsan International Licensed November 20

VivoCity, Singapore — VivoCity International Licensed December 1

Oakland, CA — Oakland Domestic Company-Operated December 8

Denver, CO — Cherry Creek Domestic Company-Operated December 10

Edgewater, CO — Edgewater Domestic Company-Operated December 19

Beijing China — Xidan International Licensed December 21

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 our 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 our Class A common stock pursuant to an "at-the-market" equity offering program.

See “Liquidity and Capital Resources” for more information.

Financial Highlights for Fiscal 2020

• Total revenue for the fiscal year ended December 30, 2020 decreased 12.1% to $522.9 million versus the prior year.

This decrease is inclusive of the favorable impact of the 53rd week in the fourth quarter 2020, which resulted in incremental revenue of $11.1 million.

Excluding the 53rd week, total revenue in fiscal year 2020 decreased 13.9%.

• Shack sales for the fiscal year ended December 30, 2020 decreased 11.9% to $506.3 million versus the prior year.

This decrease is inclusive of the favorable impact of the 53rd week in the fourth quarter 2020, which resulted in incremental Shack sales of $10.7 million.

Excluding the 53rd week, Shack sales in fiscal year 2020 decreased 13.7%.

• Same-Shack sales 1 decreased 27.8%, for the fiscal year ended December 30, 2020 versus the prior year.

• Licensed revenue for the fiscal year ended December 30, 2020 decreased 16.9% to $16.5 million versus the prior year.

This decrease is inclusive of the favorable impact of the 53rd week in the fourth quarter 2020, which resulted in incremental licensed revenue of $0.4 million.

Excluding the 53rd week, licensed revenue in fiscal year 2020 decreased 18.9%.

• Shack system-wide sales decreased 13.0% to $778.9 million, versus the prior year.

This decrease is inclusive of the favorable impact of the 53rd week in the fourth quarter 2020, which resulted in incremental Shack system-wide sales of $17.7 million.

Excluding the 53rd week, Shack system-wide sales in the fiscal year 2020 decreased 15.0%.

• Operating loss for the fiscal year ended December 30, 2020 was $43.9 million compared to operating income of $25.7 million versus the same period last year.

This operating loss includes a non-cash impairment charge of $7.6 million related to two Shacks and the expansion space of the Company's home office .

• Shack-level operating profit 2 , a non-GAAP measure, decreased 44.2% to $71.4 million, or 14.1% of Shack sales in fiscal year 2020, inclusive of a $0.9 million reduction in Occupancy and related expenses due to the closure of our Shack in Penn Station.

• Net loss was $45.5 million and adjusted EBITDA 2 , a non-GAAP measure, was $22.7 million in fiscal year 2020, compared to net income of $24.1 million and adjusted EBITDA of $81.8 million in the same period last year.

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FISCAL 2020 GUIDANCE

These forward-looking projections are subject to known and unknown risks, uncertainties and other important factors that may cause actual results to be materially different from the guidance set forth below.

Factors that may cause such differences include, but are not limited to, those discussed in Part I, Item 1A of our Form 10-K for the fiscal year under the heading “Risk Factors.” These forward-looking projections should be reviewed in conjunction with the consolidated financial statements and the section titled “Trends in Our Business” which forms the basis of our assumptions used to prepare these forward-looking projections.

You should not attribute undue certainty to these projections and we undertake no obligation to update any forward-looking information, except as required by law.

For the fiscal year ending December 30, 2020 , a 53-week fiscal year, we are providing the following preliminary financial outlook:

Total revenue (inclusive of licensing revenue) (1)

$712 million to $720 million

Licensing revenue

$21 million to $22 million

Same-Shack sales (%) (2)(3)

Low single digit decrease

Domestic company-operated Shack openings

Licensed Shack openings, net

Average annual sales volume for domestic company-operated Shacks

$3.7 to $3.8 million

Shack-level operating profit margin (%) (4)

22.0% to 22.5%

Total general and administrative expenses

$80 million to $82 million

Core general and administrative expenses

$72.2 million to $74.2 million

Equity-based compensation

approximately $7.5 million

One-time costs related to Project Concrete

approximately $0.3 million

Depreciation expense

$52.5 million to $53.5 million

Pre-opening costs

$15 million to $16 million

Interest expense

approximately $0.6 million

Adjusted pro forma effective tax rate (%) (5)

Includes approximately $15 million sales impact from the 53rd week in 2020.

Includes approximately 1.5% to 2.0% of menu price increases taken in December 2019.

Normalized for the 53rd week.

Shack-level operating profit margin is a non-GAAP measure.

A reconciliation to the most directly comparable GAAP measure, operating income, has not been provided as we cannot project certain reconciling items, such as gains or losses on disposal of property and equipment, without unreasonable effort given the uncertainty around the timing and amount of such gains or losses.

Losses on disposal of property and equipment were less than $1.5 million for each of the fiscal years 2019, 2018 and 2017.

Adjusted pro forma effective tax rate is a non-GAAP measure.

A reconciliation to the most directly comparable GAAP measure, income tax expense, has not been provided as we cannot project income tax expense without unreasonable effort due to our inability to predict changes in our ownership interest in SSE Holdings, LLC resulting from redemptions of LLC Interests by non-controlling interest holders and equity-based award activity.

Income tax expense for fiscal years 2019, 2018 and 2017 was $3.4 million, $8.9 million and $151.4 million, respectively.

• Net loss attributable to Shake Shack Inc was $42.2 million and adjusted pro forma net loss 2 , a non-GAAP measure, was $22.3 million, or a loss of $0.56 per fully exchanged and diluted share in fiscal year 2020, compared to net income attributable to Shake Shack Inc.

of $19.8 million, adjusted pro forma net income of $27.4 million, or $0.72 per fully exchanged and diluted share, in the same period last year.

• We opened 36 net system-wide Shacks , comprised of 20 domestic company-operated Shacks and 16 net licensed Shacks.

In the fourth quarter 2020, we were notified by our landlord of the early termination of our lease at Penn Station, NY.

The termination was due to the landlord’s plans to redevelop the Long Island Rail Road Concourse following the successful completion of the East End Gateway and opening of the Moynihan Train Hall.

This closure is effective as of fiscal February 2021.

(1) Fiscal 2020 excludes the impact of the 53rd week.

Same-Shack sales compares the 52 weeks from December 26, 2019 through December 23, 2020 to the 52 weeks from December 27, 2018 through December 25, 2019.

In order to compare like-for-like periods for fiscal 2021, same-Shack sales will compare the 52 weeks from December 31, 2020 through December 29, 2021 to the 52 weeks from January 2, 2020 through December 30, 2020.

(2) 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.”

Shake Shack Inc.

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RESULTS OF OPERATIONS

The following table summarizes our results of operations for fiscal 2019 , 2018 and 2017 :

The following table summarizes our results of operations for fiscal 2020 and fiscal 2019:

(dollar amounts in thousands) 2020 (1)

Shack sales $ 506,339 96.8 % $ 574,625 96.7 %

Licensing revenue 16,528 3.2 % 19,894 3.3 %

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Pre-opening costs 8,580 1.6 % 14,834 2.5 %

Loss on disposal of property and equipment

Impairment and loss on disposal of assets 10,151 1.9 % 1,352 0.2 %

TOTAL EXPENSES 566,743 108.4 % 568,834 95.7 %

OPERATING INCOME

Other income, net

OPERATING INCOME (LOSS) (43,876) (8.4) % 25,685 4.3 %

Other income (expense), net (786) (0.2) % 2,263 0.4 %

Interest expense (815) (0.2) % (434) (0.1) %

INCOME BEFORE INCOME TAXES

INCOME (LOSS) BEFORE INCOME TAXES (45,477) (8.7) % 27,514 4.6 %

Income tax expense 57 — % 3,386 0.6 %

net income attributable to non-controlling interests

NET INCOME (LOSS) (45,534) (8.7) % 24,128 4.1 %

net income (loss) attributable to non-controlling interests (3,376) (0.6) % 4,301 0.7 %

NET INCOME (LOSS) ATTRIBUTABLE TO SHAKE SHACK INC.

$ (42,158) (8.1) % $ 19,827 3.3 %

(1) We operate on a 52/53 week fiscal year that ends on the last Wednesday of the calendar year.

Fiscal year 2020 was a 53-week year with the extra operating week (the " 53rd week ") falling in our fiscal fourth quarter.

Fiscal 2019 contained 52 weeks.

(2) As a percentage of Shack sales.

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Shack sales in any period are directly influenced by the number of operating weeks in such period, the number of open Shacks and same-Shack sales.

Same-Shack sales means, for any reporting period, sales for the comparable Shack base, which we define as the number of domestic company-operated Shacks open for 24 full fiscal months or longer.

Same-Shack sales means, for any reporting period, sales performance at our Company-operated domestic Shacks that have been open for at least 24 months.

(dollar amounts in thousands) 2020 2019

Shack sales $ 506,339 $ 574,625

Percentage of total revenue 96.8 % 96.7 %

1 unchanged sentence

Percentage change compared to prior year (11.9) %

The increase in Shack sales for fiscal 2019 is primarily driven by the opening of 39 new domestic company-operated Shacks and a same-Shack sales increase of 1.3% , which was approximately $4.3 million of the total increase in Shack sales.

The same-Shack sales increase was primarily driven by a combined increase of 1.8% in price and sales mix partially offset by decreased guest traffic of 0.5% .

For purposes of calculating same-Shack sales growth, Shack sales for 85 Shacks were included in the comparable Shack base.

AUVs for domestic company-operated Shacks decreased to $4.1 million in fiscal 2019 from $4.4 million in fiscal 2018 , primarily due to the addition of Shacks with lower unit volumes to the system.

The increase in Shack sales for fiscal 2018 was primarily driven by the opening of 34 new domestic company-operated Shacks and a same-Shack sales increase of 1.0% , which was approximately $2.5 million of the total increase in Shack sales.

The same-Shack sales increase was primarily driven by a combined increase of 3.7% in price and sales mix partially offset by decreased guest traffic of 2.7% .

For purposes of calculating same-Shack sales growth, Shack sales for 61 Shacks were included in the comparable Shack base.

AUVs for domestic company-operated Shacks decreased to $4.4 million in fiscal 2018 from $4.6 million in fiscal 2017 , primarily due to the addition of Shacks with lower unit volumes to the system.

Shack Sales for the fiscal year ended December 30, 2020 decreased 11.9% to $506.3 million versus the prior year.

This decrease is inclusive of the favorable impact of the 53rd week in the fourth quarter 2020, which resulted in incremental Shack sales of $10.7 million.

Excluding the 53rd week, Shack sales in fiscal year 2020 decreased 13.7%.

The decrease in Shack sales for fiscal 2020 was primarily due a decline in same-Shack sales due to the impact from the COVID-19 pandemic, partially offset by the opening of 20 new domestic Company-operated Shacks during fiscal 2020.

Same-Shack sales improved across all regions on a sequential basis when compared to the third quarter, with performance driven by increases in in-Shack dining in both urban and suburban Shacks, combined with a high retention of digital sales.

Most notably, same-Shack sales have improved sequentially over each of the last nine months of fiscal 2020.

For fiscal 2020, same-Shack sales were down 27.8%, primarily driven by a 36.9% decrease in guest traffic partially offset by an increase in price mix of 9.1%.

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

For the purpose of calculating same-Shack sales growth for fiscal 2020, Shack sales for 114 Shacks were included in the comparable Shack base at the end of fiscal 2020.

Licensing Revenue

On December 28, 2017, we adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606).

Results for reporting periods beginning on or after December 28, 2017 are presented under Accounting Standards Codification Topic 606 ("ASC 606").

Prior period amounts were not revised and continue to be reported in accordance with ASC Topic 605 ("ASC 605"), the accounting standard then in effect.

See Note 3 to the consolidated financial statements included in Part II, Item 8 for more information.

Licensing revenue is comprised of sales-based royalty fees and amortization of certain upfront fees, including opening fees for certain licensed Shacks and initial territory fees received for the exclusive right to develop Shacks in a specific geographic area.

Prior to the adoption of ASC 606, opening fees were typically recognized as revenue when a licensed Shack opened and territory fees were recognized as revenue on a straight-line basis over the term of the license agreement.

Licensing revenue is comprised of license fees, opening fees for certain licensed Shacks and territory fees.

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

(dollar amounts in thousands) 2020 2019

3 unchanged sentences

Percentage change compared to prior year (16.9) %

The increase in licensing revenue for fiscal 2019 was primarily driven by the opening of 28 net licensed Shacks during the fiscal year and the strong performance of Shacks that opened in the new markets of Shanghai, Mexico City, Singapore and Manila.

This increase in licensing revenue for 2018 was primarily driven by the opening of 15 licensed Shacks during the fiscal year and strong performance in Asia, including the initial strength of newer Shacks in Hong Kong and Japan.

Licensed revenue for the fiscal year ended December 30, 2020 decreased 16.9% to $16.5 million versus the prior year.

This decrease is inclusive of the favorable impact of the 53rd week in the fourth quarter 2020, which resulted in incremental licensed revenue of $0.4 million.

Excluding the 53rd week, licensed revenue in fiscal year 2020 decreased 18.9%.

The decrease in licensing revenue for fiscal 2020 was primarily due to reduced sales related to the COVID-19 pandemic, partially offset by a net increase of 16 Shacks opened during fiscal 2020.

Our licensed business has shown gradual improvement, however the business continues to be impacted by the pandemic.

Our domestic licensed business still faces significant headwinds, with airport and stadium Shacks still either closed or operating at significantly reduced traffic.

As of the end of fiscal 2020, 17 licensed Shacks remained temporarily closed.

Furthermore, approximately half of the UK Shacks were closed as of the end of fiscal 2020, as the government maintained lockdowns to control the virus spread.

Shake Shack Inc.

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Food and paper costs include the direct costs associated with food, beverage and packaging of our menu items.

The components of food and paper costs are variable by nature, change with sales volume, are impacted by menu mix and are subject to increases or decreases in commodity costs.

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.

(dollar amounts in thousands) 2020 2019

3 unchanged sentences

Percentage change compared to prior year (8.8) %

The increase in food and paper costs for fiscal 2019 was primarily due to the opening of 39 new domestic company-operated Shacks during the fiscal year.

The increase in food and paper costs as a percentage of Shack sales for fiscal 2019 was driven by a higher cost profile of Chick'n Bites, which launched in January 2019;

significant commodity inflation in beef and some inflation with dairy;

and an increase in paper costs, as a direct result of digital sales mix, which comes with additional packaging.

The increase in food and paper costs for fiscal 2018 was primarily due to the opening of 34 new domestic company-operated Shacks during the fiscal year.

The decrease in food and paper costs as a percentage of Shack sales for fiscal 2018 was primarily due to the menu price increase we implemented in December 2017, sponsorship receipts for our biennial leadership retreat and costs associated with the free burger promotion in fiscal 2017 related to the launch of our mobile app that did not exist in fiscal 2018.

The decrease in Food and paper costs for fiscal 2020 was primarily due to a decline in sales volume related to the COVID-19 pandemic, partially offset by the opening of 20 new domestic Company-operated Shacks during fiscal 2020.

As a percentage of Shack sales, the increase in Food and paper costs for fiscal 2020 was primarily due to higher paper and packaging costs, with all orders packaged as 'to go' orders since the start of the pandemic, and significant inflation in beef prices, partially offset by lower chicken costs.

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

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

Labor and Related Expenses

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As we expect with other variable expense items, we expect labor costs to grow as our Shack sales grow.

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

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.

(dollar amounts in thousands) 2020 2019

3 unchanged sentences

Percentage change compared to prior year (2.5) %

The increase in labor and related expenses for fiscal 2019 was primarily due to the opening of 39 new domestic company-operated Shacks during the fiscal year.

As a percentage of Shack sales, the increase in labor and related expenses for fiscal 2019 was driven by ongoing wage inflation attributable to the availability of labor across the country, as well as the impact of increased staffing levels at new Shacks resulting in higher payroll costs

The increase in labor and related expenses for fiscal 2018 was primarily due to the opening of 34 new domestic company-operated Shacks during the fiscal year.

As a percentage of Shack sales, the increase in labor and related expenses for fiscal 2018 was due to the opening of 34 new domestic company-operated Shacks, as well as the timing of new Shack openings, which typically carry higher labor costs during the first few months of operations, and ongoing increases to hourly minimum wages and regulatory factors, such as the Fair Workweek legislation in New York City.

The decrease in labor and related expenses for fiscal 2020 was 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 20 new domestic Company-operated Shacks during fiscal 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 impact of close to $6 million on our results of operations during fiscal 2020.

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

Shake Shack Inc.

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Other Operating Expenses

Other operating expenses consist of Shack-level repairs and maintenance, utilities, Shack-level marketing expenses and other operating expenses incidental to operating our domestic company-operated Shacks, such as non-perishable supplies, credit card fees, delivery commissions and business insurance.

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.

(dollar amounts in thousands) 2020 2019

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Percentage change compared to prior year 5.9 %

The increase in other operating expenses for fiscal 2019 was primarily due to the opening of 39 new domestic company-operated Shacks during the fiscal year.

As a percentage of Shack sales, the increase in other operating expenses for fiscal 2019 was primarily due to increased Shack-level marketing activity, delivery commissions and investment in in-Shack technology infrastructure.

The increase in other operating expenses for fiscal 2018 was primarily due to the opening of 34 new domestic company-operated Shacks during the fiscal year.

As a percentage of Shack sales, the increase in other operating expenses for fiscal 2018 was primarily due to commissions paid as part of integrated delivery pilots and the impact of higher repairs and maintenance and certain fixed operating expenses spread across Shacks at a broader range of average unit volumes.

The increase in other operating expenses for fiscal 2020 was primarily due to higher delivery expense as a result of digital growth, as well as the opening of 20 new domestic Company-operated Shacks during fiscal 2020, partially offset by a reduction in expenses in our Shacks, including reduced maintenance expenses, as well as a reduction in credit card fees and other related expenses.

As a percentage of Shack sales, the increase in other operating expenses for fiscal 2020 was primarily due to higher delivery commissions as a result of digital growth and sales deleverage associated with the impact of COVID-19, 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), excluding pre-opening costs, which are recorded separately.

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.

(dollar amounts in thousands) 2020 2019

3 unchanged sentences

Percentage change compared to prior year 6.5 %

The increase in occupancy and related expenses for fiscal 2019 was primarily due to the opening of 39 new domestic company-operated Shacks during the fiscal year.

As a percentage of Shack sales, the increase in occupancy and related expenses for fiscal 2019 was driven by the adoption of the new lease accounting standard, ASU 2016-02 Leases (Topic 842), that went into effect at the beginning of this fiscal year, as well as a benefit recognized in the prior year for deferred rent related to certain historical leases with co-tenancy provisions.

The increase in occupancy and related expenses for fiscal 2018 was primarily due to the opening of 34 new domestic company-operated Shacks during the fiscal year.

As a percentage of Shack sales, the decrease in occupancy and related expenses for fiscal 2018 was primarily due to the increased number of leases where we are deemed to be the accounting owner and for which less rent expense is recognized and the impact from a one-time benefit to deferred rent related to certain historical leases with co-tenancy provisions, partially offset by the introduction of Shacks at various volumes into the system.

The increase in Occupancy and related expenses for fiscal 2020 was primarily due to the opening of 20 new domestic Company-operated Shacks during the fiscal year, partially offset by lower variable rent expense associated with lower revenue, as well as the impact of a $0.9 million reduction in Occupancy and related expenses related to the impairment, and closing of our Penn Station Shack.

In the fourth quarter 2020, we were notified by our landlord of its early termination of our lease at Penn Station, NY due to its plans to redevelop the Long Island Rail Road Concourse following the successful completion of the East End Gateway and opening of the Moynihan Train Hall.

This closure was effective as of fiscal February 2021.

As a percentage of Shack sales, the increase in Occupancy and related expenses for fiscal 2020 was primarily due to sales deleverage associated with the impact of COVID-19.

General and Administrative Expenses

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

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.

Shake Shack Inc.

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Percentage change compared to prior year (2.1) %

The increase in general and administrative expenses for fiscal 2019 was primarily driven by an increase in our investment across the business to support our growth, and $2.4 million of one-time charges, primarily related to Project Concrete.

As a percentage of total revenue, the decrease in general and administrative expenses for fiscal 2019 was primarily due sales leverage, offset by the aforementioned items.

The increase in general and administrative expenses for fiscal 2018 was primarily driven by the increase in the Company's investment across the business, particularly in the addition of headcount to support its ongoing growth initiatives and $3.9 million of one-time charges, including a legal settlement of $1.2 million and costs related to Project Concrete.

As a percentage of total revenue, the increase in general and administrative expenses for fiscal 2018 was primarily due to higher Shack sales.

The decrease in general and administrative expenses for fiscal 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 technology expenses to support our digital initiatives.

As a percentage of total revenue, the increase in general and administrative expenses for fiscal 2020 was primarily due to sales deleverage associated with the impact of COVID-19.

Depreciation Expense

5 unchanged sentences

Percentage change compared to prior year 20.8 %

The increase in depreciation expense for fiscal 2019 was primarily due to incremental depreciation associated with the capital expenditures related to the 39 new domestic company-operated Shacks that opened during the fiscal year.

As a percentage of total revenue, the increase in depreciation expense for fiscal 2019 was primarily due to incremental depreciation of property, plant and equipment related to the opening of 39 new domestic company-operated Shacks during the fiscal year, as well as the introduction of Shacks at various volumes into the system.

The increase in depreciation expense for fiscal 2018 was primarily due to incremental depreciation associated with the capital expenditures related to the 34 new domestic company-operated Shacks that opened during the fiscal year.

As a percentage of total revenue, the increase in depreciation expense for fiscal 2018 was primarily due to incremental depreciation of property, plant and equipment related to the opening of 34 new domestic company-operated Shacks during the fiscal year, as well as the introduction of Shacks at various volumes into the system.

The increase in depreciation expense for fiscal 2020 was primarily due to incremental depreciation of capital expenditures related to the opening of 20 new domestic Company-operated Shacks during fiscal 2020 and increased technology investments to support our digital initiatives.

As a percentage of total revenue, the increase in depreciation expense for fiscal 2020 was primarily due to sales deleverage associated with the impact of COVID-19.

Pre-Opening Costs

Pre-opening costs consist primarily of:

(ii) managers’ salaries;

(iii) training costs;

(iv) employee payroll and related expenses;

(iv) all costs to relocate and compensate Shack management teams prior to an opening;

(v) wages, travel and lodging costs for our opening training team and other support team members;

(vi) marketing costs;

(vii) attorney fees;

and (viii) permits and licensing.

All such costs incurred prior to the opening of a domestic company-operated Shack are expensed in the period in which the expense is incurred.

Pre-opening costs can fluctuate significantly from period to period, based on the number and timing of domestic company-operated Shack openings and the specific pre-opening costs recognized for each domestic company-operated Shack.

Additionally, domestic company-operated Shack openings in new geographic market areas will initially experience higher pre-opening costs than our established geographic market areas, such as the New York City metropolitan area, where we have greater economies of scale and typically incur lower travel and lodging costs for our training team.

Shake Shack Inc.

Form 10-K | 63

Pre-opening costs consist primarily of legal fees, rent, managers' salaries, training costs, employee payroll and related expenses, costs to relocate and compensate Shack management teams prior to an opening and wages, travel and lodging costs for our opening training team and other supporting team members.

All such costs incurred prior to the opening of a domestic Company-operated Shack are expensed in the period in which the expense was incurred.

Pre-opening costs can fluctuate significantly from period to period, based on the number and timing of domestic Company-operated Shack openings and the specific pre-opening costs incurred for each domestic Company-operated Shack.

Additionally, domestic Company-operated Shack openings in new geographic 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.

(dollar amounts in thousands) 2020 2019

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Percentage change compared to prior year (42.2) %

The increase in pre-opening costs for fiscal 2019 and 2018 was primarily due to an increased number of openings and the timing of new domestic company-operated openings.

Loss on Disposal of Property and Equipment

Loss on disposal of property and equipment represents the net book value of assets that have been retired and consists primarily of furniture, equipment and fixtures that were replaced in the normal course of business or as a part of Shack renovations.

The decrease in pre-opening costs for fiscal 2020 was due to the lower number of new domestic Company-operated Shacks opened during fiscal 2020 compared to fiscal 2019.

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Form 10-K | 62

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.

(dollar amounts in thousands) 2020 2019

Loss on disposal of property and equipment

Impairment and loss on disposal of assets $ 10,151 $ 1,352

Percentage of total revenue 1.9 % 0.2 %

1 unchanged sentence

Percentage change compared to prior year 650.8 %

The loss on disposal of property and equipment in fiscal 2019 , 2018 and 2017 was primarily due to the number of maturing Shacks in our base.

Other Income, Net

Other income, net consists of interest income, dividend income, adjustments to liabilities under our tax receivable agreement and net realized gains and losses from the sale of marketable securities.

The increase in impairment and loss on disposal of assets in fiscal 2020 was primarily due to asset impairment charges on operating lease assets and property and equipment of $7.6 million recorded during fiscal 2020, primarily relating to unused home office expansion space as well as the impairment of two Shacks — including the termination of our Penn Station Shack lease — and to a lesser extent, the number of maturing Shacks in our base.

Other Income (Expense), Net

Other income (expense), net consists of adjustments to liabilities under our tax receivable agreement, dividend income, interest income and net unrealized and realized gains and losses from the sale of marketable securities.

(dollar amounts in thousands) 2020 2019

Other income, net

Other income (expense), net $ (786) $ 2,263

Percentage of total revenue (0.2) % 0.4 %

1 unchanged sentence

Percentage change compared to prior year (134.7) %

The increase in other income, net for fiscal 2019 primarily related to dividend income, other income related to the adjustment of liabilities under the tax receivable agreement and unrealized gains related to our investments in marketable securities.

The decrease in other income, net for fiscal 2018 primarily related to a $127.2 million one-time adjustment made in the prior year to reduce our liabilities under tax receivable agreement in connection with the enactment of the Tax Cuts and Jobs Act of 2017 (the "TCJA").

No such adjustment was made in fiscal 2018.

The decrease in other income (expense), net for fiscal 2020 was primarily due to a decrease in dividend income, the absence of other income related to the adjustment of liabilities under the Tax Receivable Agreement in fiscal 2019, as well as unrealized losses related to our investments in marketable securities.

Interest Expense

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

Shake Shack Inc.

Form 10-K | 64

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

(dollar amounts in thousands) 2020 2019

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Percentage change compared to prior year 87.8 %

The decrease s in interest expense for fiscal 2019 was primarily due to the leases where we were deemed, for accounting purposes, to be the owner in the prior year, but are no longer considered to be after the adoption of the new lease accounting standard.

The decrease s in interest expense for fiscal 2018 was primarily due to the increased number of additional lease financing arrangements where we were deemed, for accounting purposes, to be the owner.

The increase in interest expense for fiscal 2020 was primarily due to an increase in interest and fees associated with our Revolving Credit Facility in the current fiscal year.

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Form 10-K | 63

Income Tax Expense

As a result of the IPO and the Organizational Transactions, we became the sole managing member of SSE Holdings, which is treated as a partnership for U.S.

We are the sole managing member of SSE Holdings, and as a result, consolidate the financial results of SSE Holdings.

SSE Holdings is treated as a partnership for U.S.

federal and most applicable state and local income tax purposes.

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We are subject to U.S.

federal income taxes, in addition to state and local income taxes with respect to our allocable share of any taxable income or loss generated by SSE Holdings.

federal income taxes, in addition to state and local income taxes with respect to our allocable share of any taxable income or loss of SSE Holdings, as well as any stand-alone income or loss generated by Shake Shack Inc.

We are also subject to withholding taxes in foreign jurisdictions.

(dollar amounts in thousands) 2020 2019

3 unchanged sentences

Percentage change compared to prior year (98.3) %

The decrease in income tax expense for fiscal 2019 was primarily driven by higher tax credits, an increase of windfall tax benefits from equity-based compensation and a decrease in valuation allowance, partially offset by an increase in our ownership interest in SSE Holdings.

As our ownership interest in SSE Holdings increases, our share of the taxable income of SSE Holdings also increases.

Our weighted-average ownership interest in SSE Holdings increased to 84.1% in fiscal 2019 from 76.6% in 2018 .

Our effective income tax rate decreased to 12.3% in fiscal 2019 from 28.8% in fiscal 2018 primarily due to the aforementioned items.

The decrease in income tax expense for fiscal 2018 was primarily driven by the remeasurement of the deferred tax assets in fiscal 2017 made in connection with the enactment of the TCJA, which resulted in $138.6 million of additional income tax expense, which was partially offset by an increase in our ownership interest in SSE Holdings.

As our ownership interest in SSE Holdings increases, our share of the taxable income of SSE Holdings also increases.

Our weighted-average ownership interest in SSE Holdings increased to 76.6% in fiscal 2018 from 70.6% in fiscal 2017 .

Our effective income tax rate decreased to 28.8% in fiscal 2018 from 94.5% in fiscal 2017 primarily due to the aforementioned remeasurement of deferred tax assets in connection with the enactment of the TCJA in the prior year.

Net Income Attributable to Non-controlling Interests

Our effective income tax rates for fiscal 2020 and fiscal 2019 were (0.1)% and 12.3%, respectively.

The decrease in our effective income tax rate from fiscal 2019 to fiscal 2020 was primarily driven by lower tax rates for foreign and state taxes mainly in connection with lower pre-tax book income and remeasurement of deferred tax assets, partially offset by lower tax credits and an increase in valuation allowance.

Net Income (Loss) Attributable to Non-controlling Interests

We are the sole managing member of SSE Holdings and have the sole voting power in, and control the management of, SSE Holdings.

Accordingly, we consolidate the financial results of SSE Holdings and report a non-controlling interest on our Consolidated Statements of Income (Loss), representing the portion of net income attributable to the other members of SSE Holdings.

The SSE Holdings LLC Agreement provides that holders of LLC Interests may, from time to time, require SSE Holdings to redeem all or a portion of their LLC Interests for newly-issued shares of Class A common stock on a one-for-one basis.

In connection with any redemption or exchange, we receive a corresponding number of LLC Interests, increasing our total ownership interest in SSE Holdings.

The weighted average ownership percentages for the applicable reporting periods are used to attribute net income and other comprehensive income to Shake Shack Inc.

The Third Amended and Restated Limited Liability Company Agreement of SSE Holdings provides that holders of LLC Interests may, from time to time, require SSE Holdings to redeem all or a portion of their LLC Interests for newly-issued shares of Class A common stock on a one-for-one basis.

In connection with any redemption or exchange, we will receive a corresponding number of LLC Interests, increasing our total ownership interest in SSE Holdings.

The weighted average ownership percentages for the applicable reporting periods are used to attribute net income (loss) and other comprehensive income to Shake Shack Inc.

and the non-controlling interest holders.

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Form 10-K | 65

(dollar amounts in thousands) 2020 2019

Net income attributable to non-controlling interests

Net income (loss) attributable to non-controlling interests $ (3,376) $ 4,301

Percentage of total revenue (0.6) % 0.7 %

1 unchanged sentence

Percentage change compared to prior year (178.5) %

The decrease in net income attributable to non-controlling interests for fiscal 2019 was primarily driven by an increase in our weighted-average ownership interest in SSE Holdings from 76.6% in fiscal 2018 to 84.1% in fiscal 2019 as a result of redemptions of LLC Interests and the GTC Merger.

The decrease in net income attributable to non-controlling interests for fiscal 2018 was primarily driven by an increase in our weighted-average ownership interest in SSE Holdings from 70.6% in fiscal 2017 to 76.6% in fiscal 2018 as a result of redemptions of LLC Interests.

The decrease in net income (loss) attributable to non-controlling interests for fiscal 2020 was primarily due to lower pre-tax book income resulting in a net loss during fiscal 2020, and a decrease in the non-controlling interest holders' weighted average ownership, which was 7.7% and 15.9% for fiscal 2020 and fiscal 2019, respectively.

Fiscal 2019 Compared to Fiscal 2018

The comparison of fiscal 2019 to fiscal 2018 has been omitted from this Form 10-K, but can be referenced in our Form 10-K for the fiscal year ended December 25, 2019, filed on February 24, 2020.

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Form 10-K | 64

NON-GAAP FINANCIAL MEASURES

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generally accepted accounting principles (“GAAP”), we use the following non-GAAP financial measures:

Shack-level operating profit, Shack-level operating profit margin, EBITDA, adjusted EBITDA, adjusted EBITDA margin, adjusted pro forma net income and adjusted pro forma earnings per fully exchanged and diluted share (collectively the "non-GAAP financial measures").

Shack-level operating profit, Shack-level operating profit margin, EBITDA, adjusted EBITDA, adjusted EBITDA margin, adjusted pro forma net income (loss), adjusted pro forma earnings (loss) per fully exchanged and diluted share and adjusted pro forma effective tax rate (collectively the "non-GAAP financial measures").

Shack-Level Operating Profit

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(dollar amounts in thousands) 2020 (1)

Operating income

2019 2018 2017 2016

Operating income (loss) (2)

$ (43,876) $ 25,685 $ 31,711 $ 33,813 $ 27,805

Licensing revenue 16,528 19,894 13,721 12,422 9,125

2 unchanged sentences

Pre-opening costs 8,580 14,834 12,279 9,603 9,520

Loss on disposal of property and equipment

Impairment and loss on disposal of assets (3)

10,151 1,352 917 608 34

Shack-level operating profit $ 71,378 $ 128,018 $ 112,906 $ 92,309 $ 73,292

1 unchanged sentence

Licensing revenue 16,528 19,894 13,721 12,422 9,125

Shack sales $ 506,339 $ 574,625 $ 445,589 $ 346,388 $ 259,350

Shack-level operating profit margin (4)

14.1 % 22.3 % 25.3 % 26.6 % 28.3 %

(1) We operate on a 52/53 week fiscal year that ends on the last Wednesday of the calendar year.

Fiscal year 2020 was a 53-week year with the extra operating week (the " 53rd week ") falling in our fiscal fourth quarter 2020.

Fiscal 2019, fiscal 2018, fiscal 2017 and fiscal 2016 each contained 52 weeks.

(2) For fiscal 2020, Operating income (loss) included a $0.9 million reduction in Occupancy and related expenses due to the closure of our Shack in Penn Station.

(3) For fiscal year 2020, this amount includes a non-cash impairment charge of $7.6 million related to two Shacks and our home office.

(4) As a percentage of Shack sales.

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.

We define Adjusted EBITDA 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 do not 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 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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Therefore, these measures may not provide a complete understanding of our performance and should be reviewed in conjunction with our GAAP financial measures.

A reconciliation of EBITDA and Adjusted EBITDA to net income, the most directly comparable GAAP measure, is as follows.

A reconciliation of EBITDA and adjusted EBITDA to Net income (loss), the most directly comparable GAAP measure, is as follows.

Shake Shack Inc.

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(in thousands) 2020 (1)

2019 2018 2017 2016

Net income (loss) $ (45,534) $ 24,128 $ 21,948 $ 8,884 $ 22,146

Depreciation expense 48,801 40,392 29,000 21,704 14,502

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Income tax expense 57 3,386 8,862 151,409 6,350

EBITDA 4,139 68,340 62,217 183,562 43,283

Equity-based compensation 5,560 7,600 6,067 5,623 5,354

Amortization of cloud-based software implementation costs (2)

1,444 312 — — —

Deferred lease costs (3)

Loss on disposal of property and equipment

Non-recurring compensation expenses related to the IPO

IPO-related expenses

Other income related to adjustment of liabilities under tax receivable agreement

92 2,608 876 983 2,251

Impairment and loss on disposal of assets (4)

10,151 1,352 917 608 34

Other (income) loss related to adjustment of liabilities under tax receivable agreement 1,147 (808) (78) (1,362) (688)

Other income related to adjustment of liabilities under tax receivable agreement resulting from the enactment of the TCJA — — — (125,859) —

Executive transition costs (5)

150 126 340 664 —

Project Concrete (6)

(229) 2,111 1,292 181 —

Costs related to relocation of home office (7)

— — 1,019 264 —

Hong Kong office (8)

Legal Settlement (9)

— — 1,200 — —

ADJUSTED EBITDA 22,739 $ 81,840 $ 73,850 $ 64,664 $ 50,234

Adjusted EBITDA margin (11)

4.3 % 13.8 % 16.1 % 18.0 % 18.7 %

(1) We operate on a 52/53 week fiscal year that ends on the last Wednesday of the calendar year.

Fiscal year 2020 was a 53-week year with the extra operating week (the " 53rd week ") falling in our fiscal fourth quarter 2020.

Fiscal 2019, fiscal 2018, fiscal 2017 and fiscal 2016 each contained 52 weeks.

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

Reflects the extent to which lease expense is greater than or less than cash lease payments.

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

As a result of adoption of the new lease accounting standard on December 27, 2018, these lease costs may also include certain additional lease components, such as common area maintenance costs and property taxes, that were previously not included in lease expense for prior periods.

Represents fees paid in connection with the search for certain of our executive and key management positions, non-recurring signing bonuses and other transition costs, including related equity-based compensation.

For fiscal 2020, this amount included a $0.9 million reduction in Occupancy and related expenses due to the closing of our Shack in Penn Station .

(4) For fiscal year 2020, this amount includes a non-cash impairment charge of $7.6 million related to two Shacks and our home office.

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

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

Costs incurred in connection with our relocation to a new Home Office.

Represents costs associated with establishing our first international regional office in Hong Kong.

(7) Represents costs incurred in connection with our relocation to a new home office.

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

(9) Expense incurred to establish an accrual related to the settlement of a legal matter.

Calculated as a percentage of total revenue, which was $594,519 , $459,310 , $358,810 , $268,475 , and $190,592 for the fiscal years ended December 25, 2019, December 26, 2018, December 27, 2017, December 28, 2016 and December 30, 2015, respectively.

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

Adjusted pro forma net income represents net income (loss) attributable to Shake Shack Inc.

assuming the full exchange of all outstanding SSE Holdings, LLC membership interests ("LLC Interests") for shares of Class A common stock, adjusted for certain non-recurring items that we do not believe directly reflect our core operations and may not be indicative of our recurring business operations.

Adjusted pro forma earnings per fully exchanged and diluted share is calculated by dividing adjusted pro forma net income by the weighted-average shares of Class A common stock outstanding, assuming the full exchange of all outstanding LLC Interests, after giving effect to the dilutive effect of outstanding equity-based awards.

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

(11) Calculated as a percentage of total revenue, which was $522.9 million, $594.5 million, $459.3 million, $358.8 million, and $268.5 million for fiscal 2020, fiscal 2019, fiscal 2018, fiscal 2017, and fiscal 2016, respectively.

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

Adjusted pro forma net income (loss) represents net income (loss) attributable to Shake Shack Inc.

assuming the full exchange of all outstanding SSE Holdings, LLC membership interests ("LLC Interests") for shares of Class A common stock, adjusted for certain non-recurring items that we do not believe are directly related to our core operations and may not be indicative of our recurring business operations.

Adjusted pro forma earnings (loss) per fully exchanged and diluted share is calculated by dividing adjusted pro forma net income (loss) by the weighted-average shares of Class A common stock outstanding, assuming the full exchange of all outstanding LLC Interests, after giving effect to the dilutive effect of outstanding equity-based awards.

How These Measures Are Useful

When used in conjunction with GAAP financial measures, adjusted pro forma net income and adjusted pro forma earnings per fully exchanged and diluted share are supplemental measures of operating performance that we believe are useful measures to evaluate our performance period over period and relative to our competitors.

By assuming the full exchange of all outstanding LLC Interests, we believe these measures facilitate comparisons with other companies that have different organizational and tax structures, as well as comparisons period over period because it eliminates the effect of any changes in net income attributable to Shake Shack Inc.

When used in conjunction with GAAP financial measures, adjusted pro forma net income (loss) and adjusted pro forma earnings (loss) per fully exchanged and diluted share are supplemental measures of operating performance that we believe are useful measures to evaluate our performance period over period and relative to our competitors.

driven by increases in our ownership of SSE Holdings, which are unrelated to our operating performance, and excludes items that are non-recurring or may not be indicative of our ongoing operating performance.

Limitations of the Usefulness of These Measures

Adjusted pro forma net income and adjusted pro forma earnings per fully exchanged and diluted share may differ from similarly titled measures used by other companies due to different methods of calculation.

Presentation of adjusted pro forma net income and adjusted pro forma earnings per fully exchanged and diluted share should not be considered alternatives to net income (loss) and earnings (loss) per share, as determined under GAAP.

While these measures are useful in evaluating our performance, it does not account for the earnings attributable to the non-controlling interest holders and therefore does not provide a complete understanding of the net income attributable to Shake Shack Inc.

Adjusted pro forma net income and adjusted pro forma earnings per fully exchanged and diluted share should be evaluated in conjunction with our GAAP financial results.

A reconciliation of adjusted pro forma net income to net income (loss) attributable to Shake Shack Inc., the most directly comparable GAAP measure, and the computation of adjusted pro forma earnings per fully exchanged and diluted share are set forth below.

Adjusted pro forma net income (loss) and adjusted pro forma earnings (loss) per fully exchanged and diluted share may differ from similarly titled measures used by other companies due to different methods of calculation.

Presentation of adjusted pro forma net income (loss) and adjusted pro forma earnings (loss) per fully exchanged and diluted share should not be considered alternatives to net income (loss) and earnings (loss) per share, as determined under GAAP.

While these measures are useful in evaluating our performance, they do not account for the earnings attributable to the non-controlling interest holders and therefore do not provide a complete understanding of the net income (loss) attributable to Shake Shack Inc.

Adjusted pro forma net income (loss) and adjusted pro forma earnings (loss) per fully exchanged and diluted share should be evaluated in conjunction with our GAAP financial results.

A reconciliation of adjusted pro forma net income (loss) to net income (loss) attributable to Shake Shack Inc., the most directly comparable GAAP measure, and the computation of adjusted pro forma earnings (loss) per fully exchanged and diluted share are set forth below.

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(in thousands, except per share amounts) 2020 (1)

2019 2018 2017 2016

Net income (loss) attributable to Shake Shack Inc.

Reallocation of net income attributable to non-controlling interests from the assumed exchange of LLC Interests (1)

Non-recurring compensation expenses incurred in connection with the IPO (2)

IPO-related expenses

$ (42,158) $ 19,827 $ 15,179 $ (320) $ 12,446

Reallocation of net income (loss) attributable to non-controlling interests from the assumed exchange of LLC Interests (2)

$ (3,376) 4,301 6,769 9,204 9,700

Executive transition costs (3)

150 126 340 664 —

Project Concrete (4)

(229) 2,111 1,292 181 —

Costs related to relocation of home office (5)

Other income related to the adjustment of liabilities under tax receivable agreement

— — 1,019 264 —

Other (income) loss related to the adjustment of liabilities under tax receivable agreement 1,147 (808) (78) (1,362) (688)

Other income related to the remeasurement of liabilities under tax receivable agreement resulting from the enactment of the TCJA — — — (125,859) —

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Legal settlement (7)

— — 1,200 — —

Asset impairment charge (8)

7,644 — — — —

Reduction in Occupancy and related expenses due to Shack closure (9)

(897) — — — —

Tax effect of change in tax basis related to the adoption of new accounting standards (10)

Income tax expense (8)

Adjusted pro forma net income

— 1,161 (311) — —

Income tax (expense) benefit (11)

15,089 446 (2,290) (377) (3,164)

Adjusted pro forma net income (loss) $ (22,345) $ 27,363 $ 26,914 $ 21,031 $ 16,768

Weighted-average shares of Class A common stock outstanding—diluted 37,129 32,251 29,179 25,876 23,449

Assumed exchange of LLC Interests for shares of Class A common stock (2)

3,096 5,921 8,663 10,773 13,360

Dilutive effect of stock options — — — 555 —

Adjusted pro forma fully exchanged weighted-average shares of Class A common stock outstanding—diluted 40,225 38,172 37,842 37,204 36,809

Adjusted pro forma earnings per fully exchanged share—diluted

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Earnings per share of Class A common stock - diluted

Adjusted pro forma earnings (loss) per fully exchanged share—diluted $ (0.56) $ 0.72 $ 0.71 $ 0.57 $ 0.46

2019 2018 2017 2016

Earnings (loss) per share of Class A common stock - diluted $ (1.14) $ 0.61 $ 0.52 $ (0.01) $ 0.53

Assumed exchange of LLC Interests for shares of Class A common stock (2)

0.01 0.02 0.06 0.26 0.07

Non-GAAP adjustments (13)

0.57 0.09 0.13 0.33 (0.14)

Dilutive impact of stock options — — — (0.01) —

Adjusted pro forma earnings per fully exchanged share—diluted

Assumes the exchange of all outstanding LLC Interests for shares of Class A common stock, resulting in the elimination of the non-controlling interest and recognition of the net income attributable to non-controlling interests.

Non-recurring compensation expense incurred in connection with the IPO.

Includes expense recognized upon settlement of outstanding unit appreciation rights, the related employer withholding taxes and the accelerated vesting of outstanding restricted Class B units.

Represents consulting and advisory fees related to our operational and financial system upgrade initiative called Project Concrete.

Costs incurred in connection with the relocation to a new Home Office, including duplicative non-cash deferred rent and legal costs.

Represents costs associated with establishing our first international regional office in Hong Kong.

Adjusted pro forma earnings (loss) per fully exchanged share—diluted $ (0.56) $ 0.72 $ 0.71 $ 0.57 $ 0.46

(1) We operate on a 52/53 week fiscal year that ends on the last Wednesday of the calendar year.

Fiscal year 2020 was a 53-week year with the extra operating week (the " 53rd week ") falling in our fiscal fourth quarter 2020.

Fiscal 2019, fiscal 2018, fiscal 2017 and fiscal 2016 each contained 52 weeks.

(2) Assumes the exchange of all outstanding LLC Interests for shares of Class A common stock, resulting in the elimination of the non-controlling interest and recognition of the net income (loss) attributable to non-controlling interests.

(3) Represents costs incurred in connection with our executive search, including fees paid to an executive recruiting firm.

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

(5) Represents costs incurred in connection with our relocation to a new home office.

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

(7) Expense incurred to establish an accrual related to the settlement of a legal matter.

For fiscal 2019, 2018, 2017, 2016 and 2015, amounts represent the tax effect of the aforementioned adjustments and pro forma adjustments to reflect corporate income taxes at assumed effective tax rates of 6.1% , 22.2% , 38.5% , 39.7% and 41.7%, respectively, which include provisions for U.S.

(8) For fiscal year 2020, this amount includes a non-cash impairment charge of $7.6 million related to two Shacks and our home office.

(9) For fiscal year 2020, this amount included a reduction of $0.9 million in Occupancy and related expenses due to the closure of our Shack in Penn Station.

(10) Represents the tax effect of change in tax basis related to the adoption of the new lease accounting standard in fiscal 2019 and the adoption of the new revenue recognition standard in fiscal 2018.

(11) For fiscal 2020, fiscal 2019, fiscal 2018, fiscal 2017 and fiscal 2016, amounts represent the tax effect of the aforementioned adjustments and pro forma adjustments to reflect corporate income taxes at assumed effective tax rates of 40.2%, 6.1%, 22.2%, 38.5% and 39.7%, respectively, which include provisions for U.S.

federal income taxes, certain LLC entity-level taxes and foreign withholding taxes, assuming the highest statutory rates apportioned to each applicable state, local and foreign jurisdiction.

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

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

Refer to the reconciliation of Adjusted Pro Forma Net Income above for further details.

Refer to the reconciliation of Adjusted Pro Forma Net Income (Loss) above for further details.

Shake Shack Inc.

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Sources and Uses of Cash

Our primary sources of liquidity are cash and cash equivalents on hand, short-term investments and availability under our Revolving Credit Facility.

As of December 25, 2019 , we maintained a cash and cash equivalents balance of $37.1 million , a short-term investments balance of $36.5 million and had $50.0 million of availability under our revolving credit facility.

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 December 30, 2020, we maintained a cash and cash equivalents balance of $146.9 million and a short-term investments balance of $36.9 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.

To date, we have not experienced difficulty accessing the capital markets;

however, future volatility in the capital markets may affect our ability to access those markets or increase the costs associated with issuing debt or equity instruments.

Our primary requirements for liquidity are to fund our working capital needs, operating and finance lease obligations, capital expenditures and general corporate needs.

Our requirements for working capital are not significant because our guests pay for their food and beverage purchases in cash or on debit or credit cards at the time of the sale and we are able to sell many of our inventory items before payment is due to the supplier of such items.

Our ongoing capital expenditures are principally related to opening new Shacks, existing Shack capital investments (both for remodels and maintenance), as well as investments in our corporate infrastructure.

In addition, we are obligated to make payments to the non-controlling interest holders under the Tax Receivable Agreement.

As of December 25, 2019 , such obligations totaled $234.4 million , of which $7.8 million is expected to be paid in fiscal 2020 .

Amounts payable under the Tax Receivable Agreement are contingent upon, among other things, (i) gener ation of future taxable income over the term of the Tax Receivable Agreement and (ii) future changes in tax laws.

Our requirements for working capital are generally not significant because our guests pay for their food and beverage purchases in cash or on debit or credit cards at the time of the sale and we are able to sell many of our inventory items before payment is due to the supplier of such items.

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

As of December 30, 2020, such obligations totaled $233.0 million.

Amounts payable under the Tax Receivable Agreement are contingent upon, among other things, (i) generation of future taxable income over the term of the Tax Receivable Agreement and (ii) future changes in tax laws.

If we do not generate sufficient taxable income in the aggregate over the term of the Tax Receivable Agreement to utilize the tax benefits, then we would not be required to make the related TRA Payments.

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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.

We believe that cash provided by operating activities, cash on hand and availability under the Revolving Credit Facility will be sufficient to fund our operating 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.

COVID-19 Update

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

On April 21, 2020, we completed the sale of 233,467 shares of our Class A common stock pursuant to the ATM Program and received $9.8 million of proceeds, net of commissions.

The proceeds were used to purchase newly-issued LLC Interests.

• On April 21, 2020, we completed an underwritten offering of 3,416,070 shares of our Class A common stock, resulting in $135.9 million of proceeds, net of underwriting discounts and commissions.

The proceeds were used to purchase newly-issued LLC Interests.

• In May 2020, we entered into an amendment to our Revolving Credit Facility that provides for a number of enhanced modifications to reflect the current and ongoing impact from COVID-19.

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.

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

As of December 30, 2020, we were in compliance with all covenants.

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We believe our existing cash and cash equivalents 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.

Summary of Cash Flows

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Cash and cash equivalents at end of period $ 146,873 $ 37,099

(1) We operate on a 52/53 week fiscal year that ends on the last Wednesday of the calendar year.

Fiscal year 2020 was a 53-week year with the extra operating week (the " 53rd week ") falling in our fiscal fourth quarter.

Fiscal 2019 contained 52 weeks.

Operating Activities

For fiscal 2019 , net cash provided by operating activities was $89.9 million compared to $85.4 million for fiscal 2018 , an increase of $4.5 million .

This increase was primarily driven by the opening of 39 new domestic company-operated Shacks during fiscal 2019 , offset by spending related to our foundational infrastructure upgrades to support our ongoing growth initiatives.

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For fiscal 2018 , net cash provided by operating activities was $85.4 million compared to $70.9 million for fiscal 2017 , an increase of $14.5 million .

This increase was primarily driven by the opening of 34 new domestic company-operated Shacks during fiscal 2018 .

For fiscal 2020, net cash provided by operating activities was $37.4 million compared to $89.9 million for fiscal 2019, a decrease of $52.5 million.

The decrease was primarily due to a decline in net income of $69.7 million, and change in operating assets and liabilities of $11.2 million, partially offset by the impact of non-cash charges of $28.4 million.

The $11.2 million change in our operating asset and liability balances was primarily driven by Accounts receivable being a source of cash of $1.0 million in fiscal 2020, driven by timing of cash receipts of open receivables, as compared to a source of cash of $10.7 million in fiscal 2019;

Accrued expenses being a source of cash of $2.2 million in fiscal 2020, primarily driven by higher accruals associated with incremental payroll costs for our hourly team members, and to a lesser extent, the timing of accruals, compared to a source of cash of $9.9 million in fiscal 2019;

partially offset by Other assets being a use of cash of $2.9 million in fiscal 2020, driven by increased assets relating to cloud-software investments, compared to a use of cash of $8.2 million in fiscal 2019.

Investing Activities

For fiscal 2020, net cash used in investing activities was $69.4 million compared to $80.7 million for fiscal 2019, a decrease of $11.3 million.

This decrease primarily relates to an increase of $25.0 million of proceeds from sales of marketable securities offset by an increase in capital expenditures of $19.0 million to construct new domestic company-operated Shacks compared to fiscal 2018 .

For fiscal 2018 , net cash used in investing activities was $86.6 million compared to $61.9 million for fiscal 2017 , an increase of $24.7 million .

This increase primarily relates to an increase in capital expenditures of $26.0 million to construct new domestic company-operated Shacks compared to fiscal 2017.

This decrease was primarily due to a decrease of $37.5 million in capital expenditures in fiscal 2020, partially offset by increased purchases of marketable securities of $19.2 million.

Financing Activities

For fiscal 2019 , net cash provided by financing activities was $3.2 million compared to $4.5 million for fiscal 2018 , a decrease of $1.3 million .

This decrease is primarily due to an increase of $1.0 million in distributions to non-controlling interest holders, $0.7 million of payments related to the TRA and principal payments on financing leases offset by an increase in proceeds from the exercise of employee stock options.

For fiscal 2020, net cash provided by financing activities was $141.8 million compared to $3.2 million for fiscal 2019, an increase of $138.6 million.

This increase is primarily due to a reduction in financing cash outflows of $1.6 million in distributions to non-controlling interest holders and $4.8 million of payments made under the Tax Receivable Agreement in fiscal 2017 that did not exist in fiscal 2018, offset by a decrease of $2.1 million in proceeds from the exercise of employee stock options.

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.

Cash Flows - Fiscal 2019 Compared to Fiscal 2018

The comparison of fiscal 2019 to fiscal 2018 has been omitted from this Form 10-K, but can be referenced in our Form 10-K for the fiscal year ended December 25, 2019, filed on February 24, 2020.

Revolving Credit Facility

We maintain a Credit Agreement that provides for a revolving credit facility of $50.0 million , of which the entire commitment is available immediately, with the ability to increase available borrowings up to an additional $100 million, to be made available subject to certain conditions.

The Credit Agreement will mature and all amounts outstanding will be due and payable in August 2024 and permits the issuance of letters of credit upon our request of up to $15.0 million .

Borrowings under the facility bear interest at either:

In August 2019, we terminated our previous revolving credit facility and entered into a new revolving credit facility agreement ("Revolving Credit Facility"), which permits borrowings up to $50.0 million, of which the entire amount is available immediately, with the ability to increase available borrowings up to an additional $100.0 million, to be made available subject to satisfaction of

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certain conditions.

The Revolving Credit Facility will mature and all amounts outstanding will be due and payable in August 2024.

The Revolving Credit Facility also permits the issuance of letters of credit upon our request of up to $15.0 million.

Borrowings under the Revolving Credit Facility will bear interest at either:

(i) LIBOR plus a percentage ranging from 1.0% to 1.5% or (ii) the base rate plus a percentage ranging from 0.0% to 0.5%, in each case depending on our net lease adjusted leverage ratio.

To the extent the LIBOR reference rate is no longer available, the administrative agent, in consultation with us, will determine a replacement rate which will be generally in accordance with similar transactions in which it serves as administrative agent.

We have $50.0 million of availability as of December 25, 2019 .

The obligations under the Credit Agreement are secured by a first-priority security interest in substantially all of the assets of SSE Holdings and the guarantors.

The obligations under the Credit Agreement were guaranteed by each of SSE Holdings' direct and indirect subsidiaries (with certain exceptions).

The Credit Agreement requires us to comply with maximum net lease adjusted leverage and minimum fixed charge coverage ratios.

In addition, the Credit Agreement contains other customary affirmative and negative covenants, including those which (subject to certain exceptions and dollar thresholds) limit our ability to incur debt;

The obligations under the Revolving Credit Facility are secured by a first-priority security interest in substantially all of the assets of SSE Holdings and the guarantors.

The obligations under the Revolving Credit Facility are guaranteed by each of SSE Holdings' direct and indirect subsidiaries (with certain exceptions).

The Revolving Credit Facility requires us to comply with maximum net lease adjusted leverage and minimum fixed charge coverage ratios.

We are not subject to these coverage ratios for a period of time due to the First Amendment to the Revolving Credit Facility described below.

In addition, the Revolving Credit Facility contains other customary affirmative and negative covenants, including those which (subject to certain exceptions and dollar thresholds) limit our ability to incur debt;

make investments;

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As of December 30, 2020 we were in compliance with all covenants.

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In May 2020, we entered into a first amendment to the Revolving Credit Facility ("First Amendment"), which, among other things, provides for modified financial covenant compliance requirements for a period of time.

The First Amendment requires us to maintain minimum liquidity of $25.0 million through July 1, 2021 and outstanding borrowings during the applicable period covered by the First Amendment bear interest at either:

(i) LIBOR plus a percentage ranging from 1.0% to 2.5% or (ii) the base rate plus a percentage ranging from 0.0% to 1.5%, in each case depending on our net lease adjusted leverage ratio.

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

CONTRACTUAL OBLIGATIONS

The following table sets forth certain contractual obligations as of December 30, 2020 and the timing and effect that such commitments are expected to have on our liquidity and capital requirements in future periods.

(in thousands)

(in thousands) Total Less than

Operating lease obligations (1)

$ 496,307 $ 45,961 $ 108,169 $ 107,446 $ 234,731

Financing lease obligations (1)

5,983 2,169 2,711 931 172

Liabilities under tax receivable agreement (2)

232,954 — 52,809 28,382 151,763

Purchase obligations 106,299 58,919 18,292 5,510 23,578

See Note 10 to the consolidated financial statements included in Item 8 for further discussion of our operating and financing leases.

See Notes 15 and 18 to the consolidated financial statements included in Item 8 for further discussion of our Tax Receivable Agreement and related liabilities.

TOTAL $ 841,543 $ 107,049 $ 181,981 $ 142,269 $ 410,244

(1) See Note 10, Leases, to the consolidated financial statements included in Item 8 for further discussion of our operating and financing leases.

(2) See Notes 15, Income Taxes, and Note 18, Commitments and Contingencies, to the consolidated financial statements for further discussion of our Tax Receivable Agreement and related liabilities.

Purchase obligations include all legally binding contracts, including commitments for the purchase, construction or remodeling of real estate and facilities, firm minimum commitments for inventory purchases, future minimum lease payments under non-cancelable operating leases without a possession date, equipment purchases, marketing-related contracts, software acquisition/license commitments and service contracts.

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Liabilities under Tax Receivable Agreement include amounts to be paid to the non-controlling interest holders, estimated over the next five years, assuming we will have sufficient taxable income over the term of the Tax Receivable Agreement to utilize the related tax benefits.

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Except for operating leases entered into in the normal course of business where we have not yet taken physical possession of the leased property, certain letters of credit entered into as security under the terms of several of our leases and the unrecorded contractual obligations set forth above, we did not have any off-balance sheet arrangements as of December 30, 2020.

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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The following discussion should be read in conjunction with the consolidated financial statements included in Part II, Item 8 of this Form 10-K.

Property and Equipment

Valuation of Long-Lived Assets

We assess potential impairments to our long-lived assets, which includes property and equipment and operating lease assets, whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable.

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Significant judgment is involved in determining the assumptions used in estimating future cash flows, including projected sales growth and operating margins.

If the carrying amount of the asset group exceeds its estimated undiscounted future cash flows, an impairment charge is recognized as the amount by which the carrying amount of the asset exceeds the fair value of the asset.

There were no impairment charges recorded during fiscal 2019 , 2018 or 2017 .

Since the determination of future cash flows is an estimate of future performance, there may be future impairments in the event that future cash flows do not meet expectations.

On December 27, 2018 we adopted ASU 2016-02, Leases (Topic 842) , using a modified retrospective approach.

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Upon the possession of a leased asset, we determine its classification as an operating or financing lease.

Most of our real estate leases are classified as operating leases and most of our equipment leases are classified as finance leases.

All of our real estate leases are classified as operating leases and most of our equipment leases are classified as finance leases.

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We make judgments regarding the probable term for each lease, which can impact the classification and accounting for a lease as financing or operating, as well as the amount of straight-lined rent expense in a particular period.

Typically, our real estate leases have initial terms ranging from 10 to 15 years and include multiple five-year renewal options.

Renewal options are generally not included in the lease term as it is not reasonably certain at commencement date that we would exercise the options to extend the lease.

Generally, our real estate leases have initial terms ranging from 10 to 15 years and typically include two five-year renewal options.

Renewal options are typically not included in the lease term as it is not reasonably certain at commencement date that we would exercise the options to extend the lease.

Our real estate leases typically provide for fixed minimum rent payments and/or contingent rent payments based upon sales in excess of specified thresholds.

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Lease expense incurred before a Shack opens is recorded in Pre-opening costs.

Once a Shack opens, we record the straight-line lease expense and any contingent rent, if applicable, in occupancy and related expenses on the Consolidated Statements of Income.

Many of our leases also require us to pay real estate taxes, common area maintenance costs and other occupancy costs which are included in occupancy and related expenses on the Consolidated Statements of Income.

We make judgments in determining the appropriate discount rate used to measure the lease liability.

Given there are no explicit rates provided in our leases, we use our incremental borrowing rate (“IBR”).

Once a Shack opens, we record the straight-line lease expense and any contingent rent, if applicable, in Occupancy and related expenses on the Consolidated Statements of Income (Loss).

Many of our leases also require us to pay real estate taxes, common area maintenance costs and other occupancy costs which are included in Occupancy and related expenses on the Consolidated Statements of Income (Loss).

We calculate operating lease assets and lease liabilities as the present value of fixed lease payments over the reasonably certain lease term beginning at the commencement date.

We measure the lease liability by discounting the future fixed contractual payments included in the lease agreement, using our incremental borrowing rate (“IBR”).

There are no explicit rates provided in our leases.

The IBR is derived from the average of the yield curves obtained from using the notching method and the recovery rate method.

The most significant assumption in calculating the incremental

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borrowing rate is our credit rating.

The most significant assumption in calculating the incremental borrowing rate is our credit rating.

We determined our credit rating based on a comparison of the financial information of SSE Holdings to other public companies and then used their respective credit ratings to develop our own.

We expend cash for leasehold improvements and to build out and equip our leased premises.

Generally, a portion of the leasehold improvements and building costs are reimbursed to us by our landlords as construction contributions pursuant to agreed-upon terms in our leases.

If obtained, landlord construction contributions usually take the form of cash, full or partial credits against our future minimum or percentage rents otherwise payable by us, or a combination thereof.

For operating leases, fixed lease payments are recognized as operating lease cost on a straight-line basis over the lease term.

For finance leases and impaired operating leases, the asset is depreciated on a straight-line basis over the remaining lease term, along with recognition of interest expense associated with accretion of the lease liability.

For leases with a lease term of 12 months or less ("short-term lease"), any fixed lease payments are recognized on a straight-line basis over such term, and are not recognized on the Consolidated Balance Sheets.

Variable lease cost for both operating and finance leases, if any, is recognized as incurred.

We expend cash for leasehold improvements to build out and equip our leased premises.

Generally, a portion of the leasehold improvements and building costs are reimbursed by our landlords as landlord incentives pursuant to agreed-upon terms in our lease agreements.

If obtained, landlord incentives usually take the form of up-front cash, full or partial credits against our future minimum or contingent rents otherwise payable by us, or a combination thereof.

In most cases, landlord incentives are received after we take possession of the property, as we meet required milestones during the construction of the property.

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Equity-Based Compensation

Equity-based compensation expense is measured based on fair value.

Equity-based compensation expense is measured based on the grant-date fair value of those awards.

For awards with graded-vesting features and service conditions only, compensation expense is recognized on a straight-line basis over the total requisite service period for the entire award.

For awards with graded-vesting features and a combination of service and performance conditions, compensation expense is recognized using a graded-vesting attribution method over the vesting period based on the most probable outcome of the performance conditions.

We determine the probability of achievement of future performance conditions based on our internal estimates of future performance, and we account for forfeitures as they occur.

We estimate the grant date fair value of stock options using the Black-Scholes valuation model.

Calculating the grant date fair value of stock-based awards is based on certain assumptions and requires judgment, including estimating stock price volatility, and expected life.

Actual distributed shares are calculated upon conclusion of the service and performance periods.

For stock option awards, the grant-date fair value of the awards is determined using the Black-Scholes

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option pricing model and involves several assumptions, including the expected term of the option, expected volatility and risk-free interest rate.

We have limited historical data of our own to utilize in determining our assumptions.

As such, for stock options granted in fiscal 2020 and 2019, we based our volatility assumption on a combined weighted average of our own historical data and that of a selected peer group.

The weighted-average volatility used in determining the grant date fair value of awards granted in fiscal 2019 and 2018 was 42.2% and 42.5% , respectively.

The weighted-average volatility used in determining the grant date fair value of awards granted in fiscal 2020 and fiscal 2019 was 42.3% and 42.2%, respectively.

Forfeitures are recognized as they occur for all equity awards.

We record valuation allowances against our deferred tax assets when it is more likely than not that all or a portion of a deferred tax asset will not be realized.

We routinely evaluate the realizability of our deferred tax assets by assessing the likelihood that our deferred tax assets will be recovered based on all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, estimates of future taxable income, tax planning strategies and results of operations.

In making such determination, we consider all available evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and results of operation.

We routinely evaluate the realizability of our deferred tax assets by assessing the likelihood that our deferred tax assets will be recovered based on all available positive and negative evidence.

Estimating future taxable income is inherently uncertain and requires judgment.

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Amounts payable under the Tax Receivable Agreement are contingent upon, among other things, (i) generation of future taxable income over the term of the Tax Receivable Agreement and (ii) future changes in tax laws.

If we do not generate sufficient taxable income in the aggregate over the

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term of the Tax Receivable Agreement to utilize the tax benefits, then we would not be required to make the related TRA Payments.

Therefore, we would only recognize a liability for TRA Payments if we determine it is probable that we will generate sufficient future taxable income over the term of the Tax Receivable Agreement to utilize the related tax benefits.

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In projecting future taxable income, we consider our historical results and incorporate certain assumptions, including projected Shack openings, revenue growth, and operating margins, among others.

During fiscal 2019 , as a result of the redemptions of LLC Interests, we recognized liabilities totaling $234.4 million relating to our obligations under the Tax Receivable Agreement, after concluding that it was probable that we would have sufficient future taxable income to utilize the related tax benefits.

If we determine in the future that we will not be able to fully utilize all or part of the related tax benefits, we would derecognize the portion of the liability related the benefits not expected to be utilized.

As of December 30, 2020, we recognized $233.0 million of liabilities relating to our obligations under the Tax Receivable Agreement, after concluding that it was probable that we would have sufficient future taxable income to utilize the related tax benefits.

There were no transactions subject to the Tax Receivable Agreement for which we did not recognize the related liability, as we concluded that we would have sufficient future taxable income to utilize all of the related tax benefits generated by all transactions that occurred in fiscal 2020.

If we determine in the future that we will not be able to fully utilize all or part of the related tax benefits, we would de-recognize the portion of the liability related the benefits not expected to be utilized.

Additionally, we estimate the amount of TRA Payments expected to be paid within the next 12 months and classify this amount as current on our Consolidated Balance Sheets.

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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-K

Item 7. Management’s Discussion and Analysis