Shake Shack Inc. 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. This section and other parts of this Quarterly Report on Form 10-Q ("Form 10-Q") contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995 ("PSLRA"), which are subject to known and unknown risks, uncertainties and other important factors that may cause actual results to be materially different from the statements made herein. All statements other than statements of historical fact are forward-looking statements including, but not limited to, statements about the Company's growth, strategic plan, and liquidity. 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," "future," "intend," "likely," "outlook," "potential," "project," "projection," "plan," "seek," "may," "could," "would," "will," "should," "can," "can have," 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-Q in the context of the risks and uncertainties disclosed in our Annual Report on Form 10-K for the fiscal year ended December 27, 2023 ("2023 Form 10-K"). The forward-looking statements included in this Form 10-Q are made only as of the date hereof. We undertake no obligation to publicly update any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law. 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. The following discussion should be read in conjunction with our 2023 Form 10-K and the Condensed Consolidated Financial Statements and notes thereto included in Part I, Item 1 of this Form 10-Q. All information presented herein is based on our fiscal calendar. Unless otherwise stated, references to particular years, quarters, months or periods refer to our fiscal years and the associated quarters, months and periods of those fiscal years. OVERVIEW Shake Shack serves modern, fun and elevated versions of American classics using only premium ingredients. We are known for our made-to-order 100% Angus beef burgers, crispy chicken, hand-spun milkshakes, house-made lemonades, beer, wine, and more. With our fine-dining roots and a commitment to crafting uplifting experiences, Shake Shack has become a cult-brand and created a new category, fine-casual. Our mission is to Stand For Something Good in all aspects of our business, including the talented team we hire and train, the premium ingredients making up our menu, our community engagement and the design of our Shacks. Stand For Something Good is a call to action for all of our stakeholders — our team, guests, communities, suppliers and investors — and we actively invite them all to share in this philosophy with us. This commitment drives our integration into the local communities in which we operate and fosters a deep and lasting connection with our guests. The following definitions apply to these terms as used herein: "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. "Same-Shack sales" represents Shack sales for the comparable Shack base, which is defined as the number of Company-operated Shacks open for 24 full fiscal months or longer. For consecutive days that Shacks were temporarily closed, the comparative period was also adjusted. “System-wide sales” is an operating measure and consists of sales from Company-operated Shacks and licensed Shacks. The Company does not recognize the sales from licensed Shacks as revenue. Of these amounts, revenue is limited to licensing Shake Shack Inc. Form 10-Q | 25 Table of Contents revenue based on a percentage of sales from licensed Shacks, as well as certain up-front fees, such as territory fees and opening fees. Key Operating Metrics Same-Shack sales for the thirteen weeks ended March 27, 2024 increased 1.6% compared to the same period last year, driven by a 3.7% increase in price mix partially offset by a 2.1% decrease in guest traffic. For the purpose of calculating same-Shack sales for the thirteen weeks ended March 27, 2024, Shack sales for 224 Shacks were included in the comparable Shack base. Average weekly sales were $73,000 for the thirteen weeks ended March 27, 2024, which was flat compared to the same period last year, primarily driven by higher menu prices, partially offset by a decline in guest traffic. System-wide sales for the thirteen weeks ended March 27, 2024 increased 12.3% to $443.3 million compared to the same period last year. Digital sales for the thirteen weeks ended March 27, 2024 increased 15.3% to $103.2 million compared to the same period last year. Digital sales includes orders placed on the Shake Shack app, website and third-party delivery platforms, which represented 36.8% of Shack sales during the thirteen weeks ended March 27, 2024. Development Highlights During the thirteen weeks ended March 27, 2024, we opened four new Company-operated Shacks and four new licensed Shacks. There was one permanent licensed Shack closure in the first quarter of 2024. The following table presents the Shacks opened during the thirteen weeks ended March 27, 2024: Location Type Opening Date Nanjing, China — Nanjing IFC Licensed 1/3/2024 North Brunswick Township, NJ — North Brunswick Company-operated 1/10/2024 Seoul, Korea — Yeouido Licensed 1/12/2024 Vienna, VA — Pike 7 Company-operated 2/20/2024 Tel Aviv, Israel — Dizengoff Licensed 2/27/2024 Santa Rosa, CA — Montgomery Village Company-operated 2/28/2024 Bloomingdale, IL — Bloomingdale Company-operated 3/7/2024 Muharraq, Bahrain — Marassi Galleria Mall Licensed 3/14/2024 As of March 27, 2024, there were 525 Shacks in operation system-wide, of which 299 were Company-operated Shacks and 226 were licensed Shacks. 26 | Shake Shack Inc. Form 10-Q Table of Contents RESULTS OF OPERATIONS The following table summarizes our results of operations for the thirteen weeks ended March 27, 2024 and March 29, 2023: Thirteen Weeks Ended (dollar amounts in thousands) March 27 2024 March 29 2023 Shack sales $ 280,552 96.6 % $ 244,254 96.4 % Licensing revenue 9,952 3.4 % 9,024 3.6 % TOTAL REVENUE 290,504 100.0 % 253,278 100.0 % Shack-level operating expenses (1) : Food and paper costs 80,253 28.6 % 71,772 29.4 % Labor and related expenses 81,509 29.1 % 74,264 30.4 % Other operating expenses 41,856 14.9 % 34,936 14.3 % Occupancy and related expenses 22,188 7.9 % 18,583 7.6 % General and administrative expenses 35,944 12.4 % 31,311 12.4 % Depreciation and amortization expense 25,441 8.8 % 21,322 8.4 % Pre-opening costs 2,753 0.9 % 3,557 1.4 % Impairment and loss on disposal of assets 526 0.2 % 722 0.3 % TOTAL EXPENSES 290,470 100.0 % 256,467 101.3 % INCOME (LOSS) FROM OPERATIONS 34 — % (3,189) (1.3) % Other income, net 3,206 1.1 % 2,837 1.1 % Interest expense (508) (0.2) % (403) (0.2) % INCOME (LOSS) BEFORE INCOME TAXES 2,732 0.9 % (755) (0.3) % Income tax expense 518 0.2 % 867 0.3 % NET INCOME (LOSS) 2,214 0.8 % (1,622) (0.6) % Less: Net income (loss) attributable to non-controlling interests 174 0.1 % (88) — % NET INCOME (LOSS) ATTRIBUTABLE TO SHAKE SHACK INC. $ 2,040 0.7 % $ (1,534) (0.6) % (1) As a percentage of Shack sales. Shack Sales Shack sales represent the aggregate sales of food, beverages and Shake Shack branded merchandise at our Company-operated Shacks and gift card breakage income. Shack sales in any period are directly influenced by the number of operating weeks in such period and the total number of open Shacks. Thirteen Weeks Ended (dollar amounts in thousands) March 27 2024 March 29 2023 Shack sales $ 280,552 $ 244,254 Percentage of Total revenue 96.6 % 96.4 % Dollar change compared to prior year $ 36,298 Percentage change compared to prior year 14.9 % Shack sales for the thirteen weeks ended March 27, 2024 increased 14.9% to $280.6 million versus the same period last year. The increase was primarily due to the opening of 39 new Company-operated Shacks between March 29, 2023 and March 27, 2024 which contributed $34.5 million and an increase in menu prices partially offset by a decline in guest traffic. Shake Shack Inc. Form 10-Q | 27 Table of Contents Licensing Revenue Licensing revenue is comprised of license fees and opening and territory fees for certain licensed Shacks. License fees are calculated as a percentage of sales and territory fees are payments for the exclusive right to develop Shacks in a specific geographic area. Thirteen Weeks Ended (dollar amounts in thousands) March 27 2024 March 29 2023 Licensing revenue $ 9,952 $ 9,024 Percentage of Total revenue 3.4 % 3.6 % Dollar change compared to prior year $ 928 Percentage change compared to prior year 10.3 % Licensing revenue for the thirteen weeks ended March 27, 2024 increased 10.3% to $10.0 million versus the same period last year. The increase was primarily due to the opening of 37 net new licensed Shacks between March 29, 2023 and March 27, 2024 which contributed $1.6 million to Licensing revenue, partially offset by a decline in sales at existing licensed Shacks, primarily in China and the Middle East. Food and Paper Costs Food and paper costs include the direct costs associated with food, beverage and packaging of our menu items. The components of Food and paper costs are variable by nature, change with sales volume, impacted by menu mix, channel mix and fluctuations in commodity costs, as well as geographic scale and proximity. Thirteen Weeks Ended (dollar amounts in thousands) March 27 2024 March 29 2023 Food and paper costs $ 80,253 $ 71,772 Percentage of Shack sales 28.6 % 29.4 % Dollar change compared to prior year $ 8,481 Percentage change compared to prior year 11.8 % Food and paper costs for the thirteen weeks ended March 27, 2024 increased 11.8% to $80.3 million versus the same period last year. The increase was primarily due to the opening of 39 new Company-operated Shacks between March 29, 2023 and March 27, 2024, which contributed approximately $9.0 million. As a percentage of Shack sales, the decrease in Food and paper costs for the thirteen weeks ended March 27, 2024 was primarily driven by menu price increases partially offset by the increases in commodities costs, mainly beef and fries and increases in marketing promotions. Labor and Related Expenses Labor and related expenses include Company-operated Shack-level hourly and management wages, bonuses, payroll taxes, equity-based compensation, workers’ compensation expense and medical benefits. As we expect with other variable expense items, labor costs should grow as our Shack sales grow. 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 Company-operated Shacks. 28 | Shake Shack Inc. Form 10-Q Table of Contents Thirteen Weeks Ended (dollar amounts in thousands) March 27 2024 March 29 2023 Labor and related expenses $ 81,509 $ 74,264 Percentage of Shack sales 29.1 % 30.4 % Dollar change compared to prior year $ 7,245 Percentage change compared to prior year 9.8 % Labor and related expenses for the thirteen weeks ended March 27, 2024 increased 9.8% to $81.5 million versus the same period last year. The increase was primarily due to the opening of 39 new Company-operated Shacks between March 29, 2023 and March 27, 2024. As a percentage of Shack sales, the decrease in Labor and related expenses for the thirteen weeks ended March 27, 2024 was primarily due to labor efficiencies partially offset by additional expenses from the opening of 39 new Company-operated Shacks between March 29, 2023 and March 27, 2024. Other Operating Expenses Other operating expenses consist of delivery commissions, Shack-level marketing expenses, repairs and maintenance, utilities and other operating expenses incidental to operating our Company-operated Shacks, such as non-perishable supplies, credit card fees and property insurance. Thirteen Weeks Ended (dollar amounts in thousands) March 27 2024 March 29 2023 Other operating expenses $ 41,856 $ 34,936 Percentage of Shack sales 14.9 % 14.3 % Dollar change compared to prior year $ 6,920 Percentage change compared to prior year 19.8 % Other operating expenses for the thirteen weeks ended March 27, 2024 increased 19.8% to $41.9 million versus the same period last year. The increase was primarily driven by higher facilities costs, mainly professional services, due to the opening of 39 new Company-operated Shacks between March 29, 2023 and March 27, 2024, as well as increases in transaction fees associated with higher sales and marketing costs. As a percentage of Shack sales, the increase in Other operating expenses for the thirteen weeks ended March 27, 2024 was primarily due to increases in delivery commissions associated with higher delivery sales and marketing spend, partially offset by lower utility costs. Occupancy and Related Expenses Occupancy and related expenses consist of Shack-level occupancy expenses (including rent, common area expenses and certain local taxes), and exclude occupancy expenses associated with unopened Shacks, which are recorded separately in Pre-opening costs. Thirteen Weeks Ended (dollar amounts in thousands) March 27 2024 March 29 2023 Occupancy and related expenses $ 22,188 $ 18,583 Percentage of Shack sales 7.9 % 7.6 % Dollar change compared to prior year $ 3,605 Percentage change compared to prior year 19.4 % Shake Shack Inc. Form 10-Q | 29 Table of Contents Occupancy and related expenses for the thirteen weeks ended March 27, 2024 increased 19.4% to $22.2 million versus the same period last year. The increase was primarily due to the opening of 39 new Company-operated Shacks between March 29, 2023 and March 27, 2024. As a percentage of Shack sales, the increase in Occupancy and related expenses for the thirteen weeks ended March 27, 2024 were primarily due to higher variable rent and occupancy taxes. General and Administrative Expenses General and administrative expenses consist of costs associated with corporate and administrative functions that support Shack development and operations, as well as equity-based compensation expense. Thirteen Weeks Ended (dollar amounts in thousands) March 27 2024 March 29 2023 General and administrative expenses $ 35,944 $ 31,311 Percentage of Total revenue 12.4 % 12.4 % Dollar change compared to prior year $ 4,633 Percentage change compared to prior year 14.8 % General and administrative expenses for the thirteen weeks ended March 27, 2024 increased 14.8% to $35.9 million versus the same period last year. The increase was primarily due to increases in wages and other team costs to support our Shack growth, costs related to the restatement of prior periods included in the fiscal 2023 Form 10-K, professional fees related to non-recurring matters, as well as investments in marketing and technology initiatives, partially offset by the absence of one-time legal settlements compared to the prior year period. As a percentage of Total revenue, General and administrative expenses was flat at 12.4% for the thirteen weeks ended March 27, 2024 and March 29, 2023, which was primarily due to sales leverage partially offset by the aforementioned items. Depreciation and Amortization Expense Depreciation and amortization expense primarily consists of the depreciation of fixed assets, including leasehold improvements and equipment. Thirteen Weeks Ended (dollar amounts in thousands) March 27 2024 March 29 2023 Depreciation and amortization expense $ 25,441 $ 21,322 Percentage of Total revenue 8.8 % 8.4 % Dollar change compared to prior year $ 4,119 Percentage change compared to prior year 19.3 % Depreciation and amortization expense for the thirteen weeks ended March 27, 2024 increased 19.3% to $25.4 million versus the same period last year. The increase was predominantly due to incremental depreciation of capital expenditures related to the opening of 39 new Company-operated Shacks and technology projects placed into service between March 29, 2023 and March 27, 2024. Pre-Opening Costs Pre-opening costs consist primarily of occupancy, manager and team member wages, cookware, travel and lodging costs for our opening training team and other supporting team members, marketing expenses, legal fees and inventory costs incurred prior to the opening of a Shack. All such costs incurred prior to the opening of a 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 Company-operated Shack openings and the specific pre-opening costs incurred for each Company-operated Shack. Additionally, Company-operated Shack openings in new geographic markets may initially experience higher pre-opening costs 30 | Shake Shack Inc. Form 10-Q Table of Contents than our established geographic markets, such as the New York City metropolitan area, where we have greater economies of scale and incur lower travel and lodging costs for our training team. Thirteen Weeks Ended (dollar amounts in thousands) March 27 2024 March 29 2023 Pre-opening costs $ 2,753 $ 3,557 Percentage of Total revenue 0.9 % 1.4 % Dollar change compared to prior year $ (804) Percentage change compared to prior year (22.6) % Pre-opening costs for the thirteen weeks ended March 27, 2024 decreased 22.6% to $2.8 million versus the same period last year. The decrease was primarily due to a reduction in wages and team costs as we standardize the training process for unopened Shacks partially offset by an increase in legal costs. Impairment and Loss on Disposal of Assets Impairment and loss on disposal of assets primarily consists of 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 which primarily consists of furniture, equipment and fixtures that were replaced in the normal course of business. Thirteen Weeks Ended (dollar amounts in thousands) March 27 2024 March 29 2023 Impairment and loss on disposal of assets $ 526 $ 722 Percentage of Total revenue 0.2 % 0.3 % Dollar change compared to prior year $ (196) Percentage change compared to prior year (27.1) % Impairment and loss on disposal of assets for the thirteen weeks ended March 27, 2024 decreased 27.1% to $0.5 million versus the same period last year. The decrease was primarily due to a decrease in abandoned construction projects partially offset by an increase in costs to replace certain equipment. Other Income, Net Other income, net consists primarily of interest income, adjustments to liabilities under the Tax Receivable Agreement, dividend income, and net unrealized and realized gains and losses from marketable securities. Thirteen Weeks Ended (dollar amounts in thousands) March 27 2024 March 29 2023 Other income, net $ 3,206 $ 2,837 Percentage of Total revenue 1.1 % 1.1 % Dollar change compared to prior year $ 369 Percentage change compared to prior year 13.0 % Other income, net for the thirteen weeks ended March 27, 2024 increased from $2.8 million to $3.2 million versus the same period last year. The increase was primarily due to an increase in interest income related to investments in marketable securities. Shake Shack Inc. Form 10-Q | 31 Table of Contents Interest Expense Interest expense generally consists of interest on the current portion of our liabilities under the Tax Receivable Agreement, imputed interest related to our financing equipment leases, amortization of deferred financing costs, interest and fees on our Revolving Credit Facility and amortization of debt issuance costs. Thirteen Weeks Ended (dollar amounts in thousands) March 27 2024 March 29 2023 Interest expense $ (508) $ (403) Percentage of Total revenue (0.2) % (0.2) % Dollar change compared to prior year $ (105) Percentage change compared to prior year 26.1 % Interest expense for the thirteen weeks ended March 27, 2024 increased 26.1% to $0.5 million versus the same period last year. The increase was primarily due to increased finance lease charges from the opening of 39 new Company-operated Shacks between March 29, 2023 and March 27, 2024. Income Tax Expense We are the sole managing member of SSE Holdings, and as a result, consolidate the financial results of SSE Holdings. SSE Holdings is treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, SSE Holdings is not subject to U.S. federal and certain state and local income taxes. Any taxable income or loss generated by SSE Holdings is passed through to and included in the taxable income or loss of its members, including us, on a pro rata basis. We are subject to U.S. federal income taxes, in addition to state and local income taxes with respect to our allocable share of any taxable income or loss of SSE Holdings, as well as any stand-alone income or loss generated by us. We are also subject to withholding taxes in foreign jurisdictions. Thirteen Weeks Ended (dollar amounts in thousands) March 27 2024 March 29 2023 Income tax expense $ 518 $ 867 Percentage of Total revenue 0.2 % 0.3 % Dollar change compared to prior year $ (349) Percentage change compared to prior year (40.3) % Our effective income tax rates for the thirteen weeks ended March 27, 2024 and March 29, 2023 were 19.0% and (114.8)%, respectively. The increase was primarily driven by the change in pre-tax income for the period compared to a pre-tax loss for the same period last year and the impact of discrete items which had a disproportionate effect on the minimal pre-tax loss in the prior year. Additionally, an increase in the Company's ownership interest in SSE Holdings increases its share of the taxable income (loss) of SSE Holdings. Our weighted-average ownership interest in SSE Holdings was 93.3% and 93.2%, respectively, for the thirteen weeks ended March 27, 2024 and March 29, 2023. 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 Condensed Consolidated Statements of Income (Loss), representing the portion of net income (loss) attributable to the other members of SSE Holdings. The Third Amended and Restated Limited Liability Company Agreement of SSE Holdings provides that holders of LLC Interests may, from time to time, require SSE Holdings to redeem all or a portion of their LLC Interests for newly-issued shares of Class A common stock on a one-for-one basis. In connection with any redemption or exchange, we will receive a corresponding number of LLC Interests, increasing our total ownership interest in SSE Holdings. The weighted average ownership percentages for the applicable reporting periods are used to attribute net income (loss) and other comprehensive income (loss) to Shake Shack Inc. and the non-controlling interest holders. 32 | Shake Shack Inc. Form 10-Q Table of Contents Thirteen Weeks Ended (dollar amounts in thousands) March 27 2024 March 29 2023 Net income (loss) attributable to non-controlling interests $ 174 $ (88) Percentage of Total revenue 0.1 % — % Net income (loss) attributable to non-controlling interests for the thirteen weeks ended March 27, 2024 improved to income of $0.2 million from a loss of $0.1 million in the same period last year. The improvement for the thirteen weeks ended March 27, 2024 was primarily due to improved net results compared to the same period last year, partially offset by a decrease in the non-controlling interest holders' weighted average ownership, which was 6.7% and 6.8%, respectively for the thirteen weeks ended March 27, 2024 and March 29, 2023. NON-GAAP FINANCIAL MEASURES To supplement the Condensed Consolidated Financial Statements, which are prepared and presented in accordance with accounting principles generally accepted in the United States of America ("GAAP"), we use the following non-GAAP financial measures: Restaurant-level profit, Restaurant-level profit margin, EBITDA, adjusted EBITDA, adjusted EBITDA margin, adjusted pro forma net income (loss) and adjusted pro forma earnings (loss) per fully exchanged and diluted share (collectively the "non-GAAP financial measures"). Restaurant-Level Profit Restaurant-level profit, formerly referred to as Shack-level operating profit, is defined as Shack sales less Shack-level operating expenses which include Food and paper costs, Labor and related expenses, Other operating expenses and Occupancy and related expenses. How This Measure Is Useful When used in conjunction with GAAP financial measures, Restaurant-level profit and Restaurant-level profit margin are supplemental measures of operating performance that we believe are useful measures to evaluate the performance and profitability of our Shacks. Additionally, Restaurant-level profit and Restaurant-level profit margin are key metrics used internally by our management to develop internal budgets and forecasts, as well as assess the performance of our Shacks relative to budget and against prior periods. It is also used to evaluate team member compensation as it serves as a metric in certain of our performance-based team member bonus arrangements. We believe the presentation of Restaurant-level profit and Restaurant-level profit margin provides investors with a supplemental view of our operating performance that can provide meaningful insights to the underlying operating performance of our Shacks, as these measures depict the operating results that are directly impacted by our Shacks and exclude items that may not be indicative of, or are unrelated to, the ongoing operations of our Shacks. It may also assist investors to evaluate our performance relative to peers of various sizes and maturities and provides greater transparency with respect to how our management evaluates our business, as well as our financial and operational decision-making. Limitations of the Usefulness of this Measure Restaurant-level profit and Restaurant-level profit margin may differ from similarly titled measures used by other companies due to different methods of calculation. Presentation of Restaurant-level profit and Restaurant-level profit margin is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. Restaurant-level profit excludes certain costs, such as General and administrative expenses and Pre-opening costs, which are considered normal, recurring cash operating expenses and are essential to support the operation and development of our Shacks. Therefore, this measure may not provide a complete understanding of the operating results of our Company as a whole and Restaurant-level profit and Restaurant-level profit margin should be reviewed in conjunction with our GAAP financial results. A reconciliation of Restaurant-level profit to Income (loss) from operations, the most directly comparable GAAP financial measure, is as follows. Shake Shack Inc. Form 10-Q | 33 Table of Contents Thirteen Weeks Ended (dollar amounts in thousands) March 27 2024 March 29 2023 Income (loss) from operations $ 34 $ (3,189) Less: Licensing revenue 9,952 9,024 Add: General and administrative expenses 35,944 31,311 Depreciation and amortization expense 25,441 21,322 Pre-opening costs 2,753 3,557 Impairment and loss on disposal of assets 526 722 Restaurant-level profit $ 54,746 $ 44,699 Total revenue $ 290,504 $ 253,278 Less: Licensing revenue 9,952 9,024 Shack sales $ 280,552 $ 244,254 Restaurant-level profit margin (1) 19.5 % 18.3 % (1) As a percentage of Shack sales. EBITDA and Adjusted EBITDA EBITDA is defined as Net income (loss) before Interest expense (net of interest income), Income tax expense and Depreciation and amortization expense. Adjusted EBITDA is defined as EBITDA (as defined above) excluding equity-based compensation expense, Impairment and loss on disposal of assets, 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. How These Measures Are Useful When used in conjunction with GAAP financial measures, EBITDA and adjusted EBITDA are supplemental measures of operating performance that we believe are useful measures to facilitate comparisons to historical performance and competitors' operating results. Adjusted EBITDA is a key metric used internally by our management to develop internal budgets and forecasts and also serves as a metric in our performance-based equity incentive programs and certain of our bonus arrangements. We believe presentation of EBITDA and adjusted EBITDA provides investors with a supplemental view of our operating performance that facilitates analysis and comparisons of our ongoing business operations because they exclude items that may not be indicative of our ongoing operating performance. Limitations of the Usefulness of These Measures EBITDA and adjusted EBITDA may differ from similarly titled measures used by other companies due to different methods of calculation. Presentation of EBITDA and adjusted EBITDA is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. EBITDA and adjusted EBITDA exclude certain normal recurring expenses. Therefore, these measures may not provide a complete understanding of our performance and should be reviewed in conjunction with our GAAP financial measures. A reconciliation of EBITDA and adjusted EBITDA to Net income (loss), the most directly comparable GAAP measure, is as follows. 34 | Shake Shack Inc. Form 10-Q Table of Contents Thirteen Weeks Ended (dollar amounts in thousands) March 27 2024 March 29 2023 Net income (loss) $ 2,214 $ (1,622) Depreciation and amortization expense 25,441 21,322 Interest expense, net (27) 403 Income tax expense 518 867 EBITDA $ 28,146 $ 20,970 Equity-based compensation 3,642 3,802 Amortization of cloud-based software implementation costs 518 439 Impairment and loss on disposal of assets 526 722 Legal settlements (1) — 1,004 CEO transition costs 479 — Restatement costs (2) 1,391 — Other (3) 1,183 628 Adjusted EBITDA $ 35,885 $ 27,565 Adjusted EBITDA margin (4) 12.4 % 10.9 % (1) Expenses incurred to establish accruals related to the settlements of legal matters. (2) Expenses incurred related to the restatement of prior periods in the 2023 Form 10-K. (3) Expenses incurred for professional fees related to non-recurring matters. (4) Calculated as a percentage of Total revenue, which was $290.5 million and $253.3 million for the thirteen weeks ended March 27, 2024 and March 29, 2023, respectively. 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 (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. 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 (loss) attributable to Shake Shack Inc. driven by increases in our ownership of SSE Holdings, which are unrelated to our operating performance, and excludes items that are non-recurring or may not be indicative of our ongoing operating performance. Limitations of the Usefulness of These Measures Adjusted pro forma net income (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 Shake Shack Inc. Form 10-Q | 35 Table of Contents 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. Thirteen Weeks Ended (in thousands, except per share amounts) March 27 2024 March 29 2023 Numerator: Net income (loss) attributable to Shake Shack Inc $ 2,040 $ (1,534) Adjustments: Reallocation of Net income (loss) attributable to non-controlling interests from the assumed exchange of LLC Interests (1) 174 (88) Legal settlements — 1,004 Restatement costs (2) 1,391 — CEO transition costs 479 — Other (3) 1,183 628 Tax impact of above adjustments (4) 356 (300) Adjusted pro forma net income (loss) $ 5,623 $ (290) Denominator: Weighted-average shares of Class A common stock outstanding—diluted 41,259 39,332 Adjustments: Assumed exchange of LLC Interests for shares of Class A common stock (1) 2,830 2,852 Adjusted pro forma fully exchanged weighted-average shares of Class A common stock outstanding—diluted 44,089 42,184 Adjusted pro forma earnings (loss) per fully exchanged share—diluted $ 0.13 $ (0.01) Thirteen Weeks Ended March 27 2024 March 29 2023 Earnings (loss) per share of Class A common stock—diluted $ 0.05 $ (0.04) Non-GAAP adjustments (5) 0.08 0.03 Adjusted pro forma earnings (loss) per fully exchanged share—diluted $ 0.13 $ (0.01) (1) Assumes the exchange of all outstanding LLC Interests for shares of Class A common stock, resulting in the elimination of the non-controlling interest and recognition of the net income (loss) attributable to non-controlling interests. (2) Expenses incurred related to the restatement of prior periods in the 2023 Form 10-K. (3) Expenses incurred for professional fees related to non-recurring matters. (4) Represents the tax effect of the aforementioned adjustments and pro forma adjustments to reflect corporate income taxes at assumed effective tax rates of 2.8% and 133.1% for the thirteen weeks ended March 27, 2024 and March 29, 2023, respectively. Amounts 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. (5) Represents the per share impact of non-GAAP adjustments for each period. Refer to the reconciliation of Adjusted pro forma net income (loss) above for additional information. 36 | Shake Shack Inc. Form 10-Q Table of Contents LIQUIDITY AND CAPITAL RESOURCES Sources and Uses of Cash Our primary sources of liquidity are cash from operations, cash and cash equivalents on hand, short-term investments and availability under our Revolving Credit Facility. As of March 27, 2024, we maintained a Cash and cash equivalents balance of $260.2 million and a short-term investments balance of $24.6 million within Marketable securities. In March 2021, we issued 0% Convertible Senior Notes (“Convertible Notes”), and received $243.8 million of proceeds, net of discounts. Refer to Note 6, Debt, in the accompanying Condensed Consolidated Financial Statements, for additional information. On June 7, 2021, 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 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. 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 technology infrastructure to support our home office, Shake Shack locations, and digital strategy. In addition, we are obligated to make payments to certain members of SSE Holdings under the Tax Receivable Agreement. As of March 27, 2024, such obligations totaled $236.7 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 payments under the Tax Receivable Agreement. Although the amount of any payments that must be made under the Tax Receivable Agreement may be significant, the timing of these payments will vary and will generally be limited to one payment per member per year. The amount of such payments are also limited to the extent we utilize the related deferred tax assets. The payments that we are required to make will generally reduce the amount of overall cash flow that might have otherwise been available to us or to SSE Holdings, but we expect the cash tax savings we will realize from the utilization of the related deferred tax assets to fund the required payments. We believe our existing cash and cash equivalents balances and cash from operations 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 The following table presents a summary of our cash flows from operating, investing and financing activities. Thirteen Weeks Ended (in thousands) March 27 2024 March 29 2023 Net cash provided by operating activities $ 30,665 $ 19,820 Net cash provided by investing activities 11,307 46,462 Net cash used in financing activities (6,421) (3,369) Effect of exchange rate changes on cash and cash equivalents (1) (4) Net increase in Cash and cash equivalents 35,550 62,909 Cash and cash equivalents at beginning of period 224,653 230,521 Cash and cash equivalents at end of period $ 260,203 $ 293,430 Shake Shack Inc. Form 10-Q | 37 Table of Contents Operating Activities For the thirteen weeks ended March 27, 2024, net cash provided by operating activities was $30.7 million compared to $19.8 million for the thirteen weeks ended March 29, 2023, an increase of $10.8 million. The increase was primarily driven by a $7.5 million improvement in net results after excluding non-cash charges as well as changes in working capital of $3.3 million. The changes in working capital included an increase in liabilities related to general business operations as well as the timing and payments related to accruals and legal settlements, partially offset by a decrease in liabilities related to bonus arrangements. Investing Activities For the thirteen weeks ended March 27, 2024, net cash provided by investing activities was $11.3 million compared to $46.5 million for the thirteen weeks ended March 29, 2023, an decrease of $35.2 million. This decrease was primarily due to a net decrease in marketable securities activity as a result of the sale of equity securities of $81.5 million in the prior year, partially offset by maturities of held-to-maturity marketable securities in the current year of $44.4 million. Financing Activities For the thirteen weeks ended March 27, 2024, net cash used in financing activities was $6.4 million compared to $3.4 million for the thirteen weeks ended March 29, 2023, an increase of $3.0 million. This increase was primarily due to an increase in withholding taxes related to net settled equity awards. Convertible Notes In March 2021, we issued $250.0 million aggregate principal amount of 0% Convertible Senior Notes due 2028 in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933. The Convertible Notes will mature on March 1, 2028, unless earlier converted, redeemed or repurchased in certain circumstances. Upon conversion, we pay or deliver, as the case may be, cash, shares of Class A common stock or a combination of cash and shares of Class A common stock, at our election. Refer to Note 6, Debt, in the accompanying Condensed Consolidated Financial Statements, for additional information. Revolving Credit Facility In August 2019, we entered into a Revolving Credit Facility, which matures in March 2026 and permits borrowings up to $50.0 million, with the ability to increase available borrowings up to an additional $100.0 million, subject to satisfaction of certain conditions. The Revolving Credit Facility also permits the issuance of letters of credit upon our request of up to $15.0 million. In June 2023, the Company entered into the fourth amendment to the Revolving Credit Facility ("Fourth Amendment"), which, among other things, modified the benchmark interest rate to either: (i) the base rate plus applicable margin ranging from 0.0% to 1.5% or (ii) the Secured Overnight Financing Rate (“SOFR”) plus applicable margin ranging from 1.0% to 2.5%, in each case depending on the net lease adjusted leverage ratio. As of March 27, 2024 and December 27, 2023, no amounts were outstanding under the Revolving Credit Facility. 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, as well as other customary affirmative and negative covenants. As of March 27, 2024, we were in compliance with all covenants. Contractual Obligations Material contractual obligations arising in the normal course of business primarily consist of operating and finance lease obligations, long-term debt, liabilities under the Tax Receivable Agreement and purchase obligations. The timing and nature of these commitments are expected to have an impact on our liquidity and capital requirements in future periods. Refer to Note 6, Debt and Note 7, Leases, in the accompanying Condensed Consolidated Financial Statements included in Part I, Item 1 for additional information relating to our long-term debt and operating and financing leases. 38 | Shake Shack Inc. Form 10-Q Table of Contents Liabilities under the Tax Receivable Agreement include amounts to be paid to the non-controlling interest holders, assuming we will have sufficient taxable income over the term of the Tax Receivable Agreement to utilize the related tax benefits. Refer to Note 10, Income Taxes, and Note 13, Commitments and Contingencies, in the accompanying Condensed Consolidated Financial Statements included in Part I, Item 1, for additional information relating to 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, equipment purchases, marketing-related contracts, software acquisition/license commitments and service contracts. The majority of our purchase obligations are due within the next 12 months. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our discussion and analysis of our consolidated financial condition and results of operations is based upon the accompanying Condensed Consolidated Financial Statements and notes thereto, which have been prepared in accordance with GAAP. The preparation of the Condensed Consolidated Financial Statements requires us to make estimates, judgments and assumptions, which we believe to be reasonable, based on the information available. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. Variances in the estimates or assumptions used to actual experience could yield materially different accounting results. On an ongoing basis, we evaluate the continued appropriateness of our accounting policies and resulting estimates to make adjustments we consider appropriate under the facts and circumstances. There have been no significant changes to our critical accounting policies as disclosed in our Annual Report on Form 10-K for the fiscal year ended December 27, 2023. Recently Issued Accounting Pronouncements Refer to Note 2, Summary of Significant Accounting Policies under Part I, Item 1 of this Form 10-Q. Item 3. Quantitative and Qualitative Disclosures About Market Risk. There have been no material changes to our exposure to market risks as described in Part II, Item 7A of our Annual Report on Form 10-K for the fiscal year ended December 27, 2023.