SHAKE SHACK INC.
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," "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. 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.
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OVERVIEW
Shake Shack serves modern, fun and elevated versions of American classics using only the best ingredients. We are known for our made-to-order Angus beef burgers, crispy chicken, hand-spun milkshakes, house-made lemonades, beer, wine, and more. Our fine dining roots 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 roots - thoughtful ingredient sourcing and preparation, hospitality and quality. Our mission is to Stand For Something Good in all aspects of our business, including the exceptional 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. For discussion of our results of operations and changes in financial condition for fiscal 2021 compared to fiscal 2020 refer to Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K for the fiscal year endedDecember 29, 2021 , filed onFebruary 18, 2022 .
The following definitions apply to these terms as used herein:
"Average unit volume" is calculated by dividing total Shack sales by the number of Shacks open during the period. For Shacks that are not open for the entire period, fractional adjustments are made to the number of Shacks in the denominator such that it corresponds to the period of associated sales. "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 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 domestic 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. Same-Shack sales percentage reflects the change in year-over-year Shack sales for the comparable Shack base. "Shack system-wide sales" is an operating measure and consists of sales from our domestic Company-operated Shacks, domestic licensed Shacks and our international licensed Shacks. We do not recognize the sales from our licensed Shacks as revenue. Of these amounts, our revenue is limited to Shack sales from domestic Company-operated Shacks and licensing revenue based on a percentage of sales from domestic and international licensed Shacks, as well as certain up-front fees such as territory and opening fees.
Recent Business Trends
We closed the fiscal fourth quarter and fiscal year endedDecember 28, 2022 with a strong finish. Despite continued macro economic challenges, we opened a total of 35 Shacks system-wide during the fiscal fourth quarter, including 22 Company-operated Shacks. As ofDecember 28, 2022 there were 436 Shacks open globally. Macroeconomic uncertainty remains, however momentum in the quarter headed in a positive direction with continued return to office and increased travel demand increasing our revenue year-over-year. Overall, we were pleased with the strength of our recent sales and margin performance, supported by early positive reception to our October pricing and growth of in-Shack traffic. Same-Shack sales for the fiscal fourth quarter endedDecember 28, 2022 increased 5.1% compared to the same period last year, with urban Shacks increasing 8.1% and suburban Shacks increasing 2.5%. This increase was driven by a 6% increase in price mix primarily due to menu price increases partially offset by a 0.9% decrease in guest traffic.
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Same-Shack sales for the fiscal year endedDecember 28, 2022 increased 7.8% compared to the same period last year, with urban Shacks increasing 14.0% and suburban Shacks increasing 2.7%. This increase was due to a 4.9% increase in guest traffic due to the return of in-Shack dining as well as an increase in price mix of 2.9%. For the purpose of calculating same-Shack sales growth for the fiscal fourth quarter and fiscal year endedDecember 28, 2022 , Shack sales for 179 Shacks were included in the comparable Shack base. Average weekly sales were$76,000 in the fiscal fourth quarter endedDecember 28, 2022 , compared to$74,000 in the same period last year, driven by higher menu prices, the opening of 22 net new domestic Company-operated Shacks and the continued growth in urban and suburban Shacks. Average weekly sales were$73,000 for the fiscal year endedDecember 28, 2022 compared to$71,000 for the same period last year, driven by the opening of 36 net new domestic Company-operated Shacks. Shack system-wide sales increased 15.8% to$364.1 million for the fiscal fourth quarter endedDecember 28, 2022 , versus the same period last year. Shack system-wide sales increased 22.7% to$1,378.5 million for the fiscal year endedDecember 28, 2022 , versus the same period last year. Average unit volume for domestic Company-operated Shacks was$3.8 million for the fiscal year endedDecember 28, 2022 compared to$3.7 million in the same period last year. Digital sales for the fiscal fourth quarter and fiscal year endedDecember 28, 2022 decreased 6.0% and 9.4% respectively, compared to the same periods last year due to guests returning in-Shack. Digital sales includes orders placed on theShake Shack app, website and third-party delivery platforms, which represented 36.2% of Shack sales during the fiscal fourth quarter endedDecember 28, 2022 . Digital sales retention was approximately 74% in fiscalDecember 2022 when compared to fiscalJanuary 2021 , when digital sales peaked. During the fiscal fourth quarter of 2022, our new purchasers in Company-owned app and web channels grew 6.7% versus the fiscal third quarter of 2022, to 4.8 million total new purchasers since mid-March of 2020.Shake Shack Inc. [[Image Removed: shak-20221228_g2.jpg]] Form 10-K | 57
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Development Highlights
During fiscal 2022, we opened 36 new domestic Company-operated Shacks and 33 new licensed Shacks. There were two permanent international licensed Shack closures and no permanent domestic Company-operated Shack closures in fiscal 2022. Below are Shacks opened during the fourth quarter of 2022. Location Type Opening Date Mexico City, MX - Mitikah International Licensed 9/29/2022 Phelps, NY - Junius Ponds Travel Plaza Domestic Licensed 10/6/2022 Beverly Hills, CA - Beverly Hills Domestic Company-operated 10/7/2022 Bishan, Singapore - Junction 8 International Licensed 10/13/2022 Manila, Philippines - Mall of Asia International Licensed 10/21/2022 Jamaica, NY - Jamaica Ave Domestic Company-operated 10/24/2022 Boca Raton, FL - Town Center at Boca Domestic Company-operated 10/26/2022 Osaka, Japan - Universal Studios Japan International Licensed 10/27/2022 Hingham, MA - Derby Street Shoppes Domestic Company-operated 10/28/2022 Indianapolis, IN - Indianapolis Domestic Licensed 11/1/2022International Airport Orlando, FL - Orlando International Airport Domestic Licensed 11/1/2022 Sterling Heights, MI - Sterling Heights Domestic Company-operated 11/4/2022 Nanjing, China - Nanjing, MixC International Licensed 11/5/2022 Los Angeles, CA - Silverlake Domestic Company-operated 11/7/2022 Baton Rouge, LA - Baton Rouge Domestic Company-operated 11/14/2022 Brookfield, WI - Brookfield Domestic Company-operated 11/17/2022 Roseville, MN - Rosedale Center Domestic Company-operated 11/18/2022 Suzhou, China - Suzhou Center International Licensed 11/19/2022 Edison, NJ - Menlo Park Domestic Company-operated 11/26/2022 Jersey City, NJ - Newport Centre Domestic Company-operated 11/30/2022 Doha, Qatar - Doha City Center International Licensed 11/30/2022 Bucheon, South Korea - Bucheon International Licensed 12/2/2022 Fort Worth, TX - Westbend Domestic Company-operated 12/3/2022 Plano, TX - Park and Preston Domestic Company-operated 12/5/2022 Boston, MA - Prudential Center Domestic Company-operated 12/5/2022 Baltimore, MD - Canton Domestic Company-operated 12/14/2022 San Jose, CA - Westfield Oakridge Domestic Company-operated 12/15/2022 Atlanta, GA - West Midtown Domestic Company-operated 12/20/2022 San Francisco, CA - Stonestown Galleria Domestic Company-operated 12/22/2022 Chapel Hill, NC - Chapel Hill Domestic Company-operated 12/22/2022 Beijing, China - Hopson One International Licensed 12/22/2022 Shanghai, China - QingPu Outlets International Licensed 12/23/2022 Canoga Park, CA - Westfield Topanga Domestic Company-operated 12/27/2022 Brooklyn, NY - Kings Plaza Domestic Company-operated 12/27/2022 Springfield, PA - Springfield Domestic Company-operated 12/27/2022
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RESULTS OF OPERATIONS
The following table summarizes our results of operations for fiscal 2022 and fiscal 2021: (dollar amounts in thousands) 2022 2021 Shack sales$ 869,270 96.5 %$ 714,989 96.6 % Licensing revenue 31,216 3.5 % 24,904 3.4 % TOTAL REVENUE 900,486 100.0 % 739,893 100.0 %
Shack-level operating expenses(1):
Food and paper costs 261,584 30.1 % 218,262 30.5 %
Labor and related expenses 257,358 29.6 % 215,114 30.1 %
Other operating expenses 130,869 15.1 % 103,232 14.4 %
Occupancy and related expenses 68,508 7.9 % 59,228 8.3 %
General and administrative expenses 118,790 13.2 % 85,996 11.6 %
Depreciation and amortization expense 72,796 8.1 % 58,991 8.0 %
Pre-opening costs 15,050 1.7 % 13,291 1.8 %
Impairment and loss on disposal of assets 2,425 0.3 % 1,632 0.2 %
TOTAL EXPENSES 927,380 103.0 % 755,746 102.1 %
LOSS FROM OPERATIONS (26,894) (3.0) % (15,853) (2.1) %
Other income, net 4,127 0.5 % 95 - %
Interest expense (1,518) (0.2) % (1,577) (0.2) %
LOSS BEFORE INCOME TAXES (24,285) (2.7) % (17,335) (2.3) %
Income tax expense (benefit) 1,682 0.2 % (7,224) (1.0) %
NET LOSS (25,967) (2.9) % (10,111) (1.4) %
Less: Net loss attributable to non-controlling interests (1,876) (0.2) % (1,456) (0.2) %
NET LOSS ATTRIBUTABLE TO SHAKE SHACK INC. $ (24,091) (2.7) % $ (8,655) (1.2) %
(1)As a percentage of Shack sales.
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Shack Sales
Shack sales represent the aggregate sales of food, beverages andShake Shack branded merchandise at our domestic 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. (dollar amounts in thousands) 2022 2021 Shack sales$ 869,270 $ 714,989 Percentage of Total revenue 96.5 % 96.6 % Dollar change compared to prior year$ 154,281 Percentage change compared to prior year 21.6 %
Shack sales for the fiscal year ended
Licensing Revenue
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) 2022 2021
Licensing revenue $ 31,216 $ 24,904
Percentage of Total revenue 3.5 % 3.4 %
Dollar change compared to prior year $ 6,312
Percentage change compared to prior year 25.3 %
Licensing revenue for the fiscal year ended December 28, 2022 increased 25.3% to
$31.2 million versus the prior year. The increase was primarily due to 31 net
new licensed Shacks opened during fiscal 2022, which contributed approximately
$2.8 million to Licensing revenue, as well as higher sales at existing licensed
Shacks, particularly domestic airports.
Food and Paper Costs
Food and paper costs include the direct costs associated with food, beverage and
packaging of our menu items. The components of food and paper costs are variable
by nature, changing with sales volume, and are impacted by menu mix, channel mix
and fluctuations in commodity costs, as well as geographic scale and proximity.
(dollar amounts in thousands) 2022 2021
Food and paper costs $ 261,584 $ 218,262
Percentage of Shack sales 30.1 % 30.5 %
Dollar change compared to prior year $ 43,322
Percentage change compared to prior year 19.8 %
Food and paper costs for the fiscal year ended December 28, 2022 increased 19.8%
to $261.6 million versus the prior year. The increase was primarily due to the
opening of 36 net new domestic Company-operated Shacks during fiscal 2022 as
well as continued inflation in commodities such as dairy, paper and chicken.
As a percentage of Shack sales, the decrease in Food and paper costs for fiscal 2022 was primarily due to menu price increases partially offset by higher commodity costs. However, beef costs declined during fiscal 2022.
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Labor and Related Expenses
Labor and related expenses include domestic 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
domestic Company-operated Shacks.
(dollar amounts in thousands) 2022 2021
Labor and related expenses $ 257,358 $ 215,114
Percentage of Shack sales 29.6 % 30.1 %
Dollar change compared to prior year $ 42,244
Percentage change compared to prior year 19.6 %
Labor and related expenses for the fiscal year ended December 28, 2022 increased
19.6% to $257.4 million versus the prior year. The increase was primarily due to
the opening of 36 net new domestic Company-operated Shacks during fiscal 2022 as
well as increased wages and salaries for our Shack teams.
As a percentage of Shack sales, Labor and related expenses declined from 30.1%
in fiscal 2021 to 29.6% in fiscal 2022. This decrease was primarily due to sales
leverage, partially offset by more managers per Shack and increased wages and
salaries.
Other Operating Expenses
Other operating expenses consist of delivery commissions, Shack-level marketing expenses, repairs and maintenance, utilities and other operating expenses incidental to operating our domestic Company-operated Shacks, such as non-perishable supplies, credit card fees and property insurance.
(dollar amounts in thousands) 2022
2021
Other operating expenses$ 130,869 $ 103,232 Percentage of Shack sales 15.1 % 14.4 % Dollar change compared to prior year$ 27,637 Percentage change compared to prior year 26.8 % Other operating expenses for the fiscal year endedDecember 28, 2022 increased 26.8% to$130.9 million versus the prior year. The increase was primarily due to the opening of 36 net new domestic Company-operated Shacks during fiscal 2022, increased facilities costs, mainly utilities and cleaning, as well as increased transaction costs and repairs and maintenance. As a percentage of Shack sales, Other operating expenses increased from 14.4% in fiscal 2021 to 15.1% in fiscal 2022. This increase was primarily due to increased facilities costs primarily related to higher costs of cleaning and utility services as well as increased marketing expense, partially offset by sales leverage and delivery mix.
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.
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(dollar amounts in thousands) 2022 2021
Occupancy and related expenses $ 68,508 $ 59,228
Percentage of Shack sales 7.9 % 8.3 %
Dollar change compared to prior year $ 9,280
Percentage change compared to prior year 15.7 %
Occupancy and related expenses for the fiscal year ended
As a percentage of Shack sales, the decrease in Occupancy and related expenses for fiscal 2022 was primarily due to sales leverage partially offset by increases in variable rent from higher sales.
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. (dollar amounts in thousands) 2022 2021 General and administrative expenses$ 118,790 $ 85,996 Percentage of Total revenue 13.2 % 11.6 % Dollar change compared to prior year$ 32,794 Percentage change compared to prior year 38.1 % General and administrative expenses for the fiscal year endedDecember 28, 2022 increased 38.1% to$118.8 million versus the prior year. The increase was primarily due to an increase in wages and other team costs to support our Shack growth, an accrual of$6.7 million related to legal matters as well as investments in marketing and technology initiatives. As a percentage of Total revenue, the increase in General and administrative expenses for fiscal 2022 was primarily due to the aforementioned increase in wages and other team costs to support our Shack growth, investment spend and legal accrual.
Depreciation and Amortization Expense
Depreciation and amortization expense primarily consists of the depreciation of fixed assets, including leasehold improvements and equipment.
(dollar amounts in thousands) 2022 2021 Depreciation and amortization expense$ 72,796 $ 58,991 Percentage of Total revenue 8.1 % 8.0 % Dollar change compared to prior year$ 13,805 Percentage change compared to prior year 23.4 % Depreciation and amortization expense for the fiscal year endedDecember 28, 2022 increased 23.4% to$72.8 million versus the prior year. The increase was primarily due to incremental depreciation of capital expenditures related to the opening of 36 net new domestic Company-operated Shacks during fiscal 2022 as well as additional depreciation related to the home office expansion and technology projects placed in service. As a percentage of Total revenue, the increase in Depreciation and amortization expense for fiscal 2022 was primarily due to the aforementioned new Shack openings as well as the additional depreciation related to the home office expansion and technology projects placed into service, partially offset by accelerated depreciation expense related to the closure of the Company's Shack inNew York City's Penn Station in fiscal 2021.
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Pre-Opening Costs
Pre-opening costs consist primarily of occupancy, manager and team member wages, cookware, travel and lodging costs for our opening training team and other supporting team members, marketing expenses, legal fees and inventory costs incurred prior to the opening of a Shack. All such costs incurred prior to the opening of a domestic Company-operated Shack are expensed in the period in which the expense was incurred. Pre-opening costs can fluctuate significantly from period to period, based on the number and timing of domestic Company-operated Shack openings and the specific pre-opening costs incurred for each domestic Company-operated Shack. Additionally, domestic Company-operated Shack openings in new geographic markets may initially experience higher pre-opening costs than our established geographic markets, such as theNew York City metropolitan area, where we have greater economies of scale and incur lower travel and lodging costs for our training team. (dollar amounts in thousands) 2022 2021 Pre-opening costs$ 15,050 $ 13,291 Percentage of Total revenue 1.7 % 1.8 % Dollar change compared to prior year$ 1,759 Percentage change compared to prior year 13.2 % Pre-opening costs for the fiscal year endedDecember 28, 2022 increased 13.2% to$15.1 million versus the prior year. The increase was due to increased occupancy expense primarily related to the timing of Shack openings throughout the year and increased wages and travel related costs for our Shack teams, partially offset by a decrease in legal fees related to professional services.
Impairment and Loss on Disposal of Assets
Impairment and loss on disposal of assets consist of impairment charges related to our long-lived assets, which includes property and equipment, as well as operating and finance lease assets. Additionally, Impairment and loss on disposal of assets includes the net book value of assets that have been retired which primarily consists of furniture, equipment and fixtures that were replaced in the normal course of business. (dollar amounts in thousands)
2022 2021
Impairment and loss on disposal of assets$ 2,425 $ 1,632 Percentage of Total revenue 0.3 % 0.2 % Dollar change compared to prior year$ 793 Percentage change compared to prior year 48.6 % Impairment and loss on disposal of assets for the fiscal year endedDecember 28, 2022 increased 48.6% to$2.4 million versus the prior year. The increase was primarily due to the number of Shacks maturing in our base as well as the non-cash impairment charge of$0.1 million during fiscal 2022 related to one Shack. Other Income, Net Other income, net consists of interest income, adjustments to liabilities under our tax receivable agreement, dividend income and net unrealized and realized gains and losses from marketable securities. (dollar amounts in thousands)
2022 2021
Other income, net $ 4,127 $ 95
Percentage of Total revenue 0.5 % - %
Dollar change compared to prior year $ 4,032
Percentage change compared to prior year 4,244.2 %
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Other income, net for the fiscal year endedDecember 28, 2022 increased from$0.1 million to$4.1 million versus the prior year. The increase was primarily due to an increase in dividend income of$3.7 million related to an increase in interest rates. Interest Expense Interest expense generally consists of interest on the current portion of our liabilities under the Tax Receivable Agreement, imputed interest related to our financing equipment leases, amortization of deferred financing costs, interest and fees on our Revolving Credit Facility and amortization of debt issuance costs. (dollar amounts in thousands) 2022 2021 Interest expense$ (1,518) $ (1,577) Percentage of Total revenue (0.2) % (0.2) % Dollar change compared to prior year$ 59 Percentage change compared to prior year (3.7) % Interest expense for the fiscal year endedDecember 28, 2022 decreased 3.7% to$1.5 million versus the prior year. The decrease was primarily due to sponsorship credits received from our banking partners partially offset by an increase in amortization expense related to our Convertible Notes issued inMarch 2021 .
Income Tax Expense (Benefit)
We are the sole managing member ofSSE Holdings , and as a result, consolidate the financial results ofSSE Holdings .SSE Holdings is treated as a partnership forU.S. federal and most applicable state and local income tax purposes. As a partnership,SSE Holdings is not subject toU.S. federal and certain state and local income taxes. Any taxable income or loss generated bySSE Holdings is passed through to and included in the taxable income or loss of its members, including us, on a pro rata basis. We are subject toU.S. federal income taxes, in addition to state and local income taxes with respect to our allocable share of any taxable income or loss ofSSE Holdings , as well as any stand-alone income or loss generated by us. We are also subject to withholding taxes in foreign jurisdictions. (dollar amounts in thousands) 2022 2021 Income tax expense (benefit)$ 1,682 $ (7,224) Percentage of Total revenue 0.2 % (1.0) % Dollar change compared to prior year$ 8,906 Percentage change compared to prior year (123.3) % Our effective income tax rates for fiscal 2022 and fiscal 2021 were (6.9)% and 41.7%, respectively. The decrease in our effective income tax rate from fiscal 2021 to fiscal 2022 was primarily driven by additional expense related to an increase in valuation allowance, increase in foreign tax expense and net expense related to equity-based compensation, partially offset by higher tax credits.
Net Loss Attributable to Non-controlling Interests
We are the sole managing member ofSSE Holdings and have the sole voting power in, and control the management of,SSE Holdings . Accordingly, we consolidate the financial results ofSSE Holdings and report a non-controlling interest on our Consolidated Statements of Loss, representing the portion of net loss attributable to the other members ofSSE Holdings . The Third Amended and Restated Limited Liability Company Agreement ofSSE Holdings provides that holders of LLC Interests may, from time to time, requireSSE 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 inSSE Holdings . The weighted average ownership percentages for the applicable reporting periods are used to attribute net loss and other comprehensive loss toShake Shack Inc. and the non-controlling interest holders.
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(dollar amounts in thousands) 2022 2021 Net loss attributable to non-controlling interests$ (1,876) $ (1,456) Percentage of Total revenue (0.2) % (0.2) % Dollar change compared to prior year$ (420) Percentage change compared to prior year 28.8 % Net loss attributable to non-controlling interests for the fiscal year endedDecember 28, 2022 increased 28.8% to$1.9 million versus the prior year. The increase was primarily due to a decline in net results compared to fiscal 2021 partially offset by a decrease in the non-controlling interest holders' weighted average ownership, which was 6.9% and 7.0% for fiscal 2022 and fiscal 2021, respectively.
NON-GAAP FINANCIAL MEASURES
To supplement the Consolidated Financial Statements, which are prepared and presented in accordance with accounting principles generally accepted inthe United States of America ("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 loss, adjusted pro forma loss per fully exchanged and diluted share (collectively the "non-GAAP financial measures").
Shack-Level Operating Profit
Shack-level operating profit is defined as Shack sales less Shack-level operating expenses including 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, Shack-level operating profit and Shack-level operating profit margin are supplemental measures of operating performance that we believe are useful measures to evaluate the performance and profitability of our Shacks. Additionally, Shack-level operating profit and Shack-level operating 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 presentation of Shack-level operating profit and Shack-level operating 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
Shack-level operating profit and Shack-level operating profit margin may differ
from similarly titled measures used by other companies due to different methods
of calculation. Presentation of Shack-level operating profit and Shack-level
operating 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. Shack-level operating 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 Shack-level operating profit and Shack-level operating profit margin
should be reviewed in conjunction with our GAAP financial results. A
reconciliation of Shack-level operating profit to Loss from Operations, the most
directly comparable GAAP financial measure, is as follows.
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(dollar amounts in thousands) 2022 2021 2020 Loss from operations(1)$ (26,894) $ (15,853) $ (43,876) Less: Licensing revenue 31,216 24,904 16,528 Add: General and administrative expenses 118,790 85,996 64,250 Depreciation and amortization expense 72,796 58,991 48,801 Pre-opening costs 15,050 13,291 8,580 Impairment and loss on disposal of assets(2) 2,425 1,632 10,151 Shack-level operating profit$ 150,951 $ 119,153 $ 71,378 Total revenue$ 900,486 $ 739,893 $ 522,867 Less: Licensing revenue 31,216 24,904 16,528 Shack sales$ 869,270 $ 714,989 $ 506,339 Shack-level operating profit margin(3,4) 17.4% 16.7% 14.1%
(1)Fiscal 2020 included a
(2)Fiscal 2022 included a non-cash impairment charge of$0.1 million related to one Shack and fiscal 2020 included a non-cash impairment charge of$7.6 million related to two Shacks and our home office.
(3)For fiscal 2022, Shack-level operating profit margin included a
(4)As a percentage of Shack sales.
EBITDA and Adjusted EBITDA
EBITDA is defined as Net 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 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 loss, the most directly comparable GAAP measure, is as follows.
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(in thousands) 2022 2021 2020 Net loss$ (25,967) $ (10,111) $ (45,534) Depreciation and amortization expense 72,796 58,991 48,801 Interest expense, net 1,518 1,577 815 Income tax expense (benefit) 1,682 (7,224) 57 EBITDA 50,029 43,233 4,139 Equity-based compensation 13,326 8,703 5,560 Amortization of cloud-based software implementation costs(1) 1,500 1,245 1,444 Deferred lease costs(2) (2,247) 245 92 Impairment and loss on disposal of assets(3) 2,425 1,632 10,151 Legal settlements(4) 6,710 560 - Gift card breakage cumulative catch-up adjustment (1,281) - - Debt offering related costs(5) - 231 - Executive transition costs 34 179 150
Other (income) loss related to adjustment of liabilities under tax receivable agreement
- (2) 1,147
Project Concrete(6) - - (229)
Other(7) - - 285
ADJUSTED EBITDA $ 70,496 $ 56,026 $ 22,739
Adjusted EBITDA margin(8) 7.8% 7.6% 4.3%
(1)Represents amortization of capitalized implementation costs related to
cloud-based software arrangements that are included within General and
administrative expenses.
(2)Reflects the extent to which lease expense is greater than or less than
contractual fixed base rent. Fiscal 2020, included a $0.9 million reduction in
Occupancy and related expenses related to the closing of the Company's Shack in
New York City's Penn Station .
(3)Fiscal 2022, included a non-cash impairment charge of $0.1 million related to
one Shack. Fiscal 2020, included a non-cash impairment charge of $7.6 million
related to two Shacks and our home office.
(4)Expenses incurred to establish accruals related to the settlements of legal
matters. Refer to Note 17, Commitments and Contingencies, in the accompanying
Consolidated Financial Statements, for additional information.
(5)Costs incurred in connection with the Company's Convertible Notes, issued in
March 2021 , including consulting and advisory fees. Refer to Note 8, Debt, in
the accompanying Consolidated Financial Statements, for additional information.
(6)Represents consulting and advisory fees related to the Company's
enterprise-wide system upgrade initiative called Project Concrete completed in
fiscal 2019.
(7)Represents incremental expenses incurred related to an inventory adjustment
and certain team member related expenses.
(8)Calculated as a percentage of Total revenue, which was $900.5 million , $739.9
million and $522.9 million , respectively, for fiscal 2022, fiscal 2021 and
fiscal 2020.
Shake Shack Inc. [[Image Removed: shak-20221228_g2.jpg]] Form 10-K | 67
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Adjusted Pro Forma Net Loss and Adjusted Pro Forma Loss Per Fully Exchanged and Diluted Share
Adjusted pro forma net loss represents Net loss attributable toShake Shack Inc. assuming the full exchange of all outstandingSSE 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 loss per fully exchanged and diluted share is calculated by dividing adjusted pro forma net 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 loss and adjusted pro forma 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 loss attributable toShake Shack Inc. driven by increases in our ownership ofSSE 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 loss and adjusted pro forma 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 loss and adjusted pro forma loss per fully exchanged and diluted share should not be considered alternatives to net 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 loss attributable toShake Shack Inc. Adjusted pro forma net loss and adjusted pro forma loss per fully exchanged and diluted share should be evaluated in conjunction with our GAAP financial results. A reconciliation of adjusted pro forma net loss to Net loss attributable toShake Shack Inc. , the most directly comparable GAAP measure, and the computation of adjusted pro forma loss per fully exchanged and diluted share are set forth below.
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(in thousands, except per share amounts) 2022 2021 2020
Numerator:
Net loss attributable to Shake Shack Inc. $ (24,091) $ (8,655) $ (42,158)
Adjustments:
Reallocation of Net lossattributable to non-controlling
interests from the assumed exchange of LLC Interests(1) (1,876) (1,456) (3,376)
Legal settlements(2) 6,710 560 -
Gift card breakage cumulative catch-up adjustment (1,281) - -
Asset impairment charge(3) 99 - 7,644
Executive transition costs 34 179 150
Debt offering related costs(4) - 231 -
Other (income) loss related to the adjustment of
liabilities under tax receivable agreement - (2) 1,147
Revolving Credit Facility amendments related costs(5) - 323 -
Reduction in Occupancy and related expenses due to Shack
closure(6) - - (897)
Project Concrete(7) - - (229)
Other(8) - - 285
Tax impact of above adjustments (9) 7,498 6,175 15,089
Adjusted pro forma net loss $ (12,907) $ (2,645) $ (22,345) Denominator:
Weighted average shares of Class A common stock outstanding-diluted 39,237 39,085 37,129
Adjustments:
Assumed exchange of LLC Interests for shares of Class A
common stock(1) 2,892 2,927 3,096
Adjusted pro forma fully exchanged weighted average shares of Class A common
stock outstanding-diluted 42,129 42,012 40,225
Adjusted pro forma loss per fully exchanged share-diluted $ (0.31) $ (0.06) $ (0.56)
2022 2021 2020
Loss per share of Class A common stock-diluted $ (0.61) $ (0.22) $ (1.14)
Assumed exchange of LLC Interests for shares of Class A common (0.01) (0.02) 0.01
stock(1)
Non-GAAP adjustments(10) 0.31 0.18 0.57
Adjusted pro forma loss per fully exchanged share-diluted $ (0.31) $ (0.06) $ (0.56)
(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 loss attributable to non-controlling interests.
(2)Expenses incurred to establish accruals related to the settlements of legal
matters. Refer to Note 17, Commitments and Contingencies, in the accompanying
Consolidated Financial Statements, for additional information.
(3)Fiscal 2022 included a non-cash impairment charge of $0.1 million related to
one Shack. Fiscal 2020 included a non-cash impairment charge of $7.6 million
related to two Shacks and our home office.
(4)Costs incurred in connection with the Company's Convertible Notes, issued in
March 2021 , including consulting and advisory fees. Refer to Note 8, Debt, in
the accompanying Consolidated Financial Statements, for additional information.
(5)Expense incurred in connection with the Company's amendments on the Revolving
Credit Facility, including the write-off of previously capitalized costs on the
Revolving Credit Facility.
(6)Fiscal 2020 includes a
(7)Represents consulting and advisory fees related to our enterprise-wide system upgrade initiative called Project Concrete completed in fiscal 2019.
(8)Represents incremental expenses incurred related to an inventory adjustment and certain team member related expenses.
(9)For fiscal 2022, fiscal 2021 and fiscal 2020, amounts represent the tax effect of the aforementioned adjustments and pro forma adjustments to reflect corporate income taxes at assumed effective tax rates of 31.1%, 83.5% and 40.2%, respectively, which include provisions forU.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. (10)Represents the per share impact of non-GAAP adjustments for each period. Refer to the reconciliation of Adjusted Pro Forma Net Loss above, for additional information.Shake Shack Inc. [[Image Removed: shak-20221228_g2.jpg]] Form 10-K | 69
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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 ofDecember 28, 2022 , we maintained a Cash and cash equivalents balance of$230.5 million and a short-term investments balance of$80.7 million within Marketable securities. InMarch 2021 , we issued 0% Convertible Senior Notes ("Convertible Notes"), and received$243.8 million of proceeds, net of discounts. Refer to Note 8, Debt, in the accompanying Consolidated Financial Statements, for additional information.
On
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 ofSSE Holdings under the Tax Receivable Agreement. As ofDecember 28, 2022 , such obligations totaled$234.9 million . Amounts payable under the Tax Receivable Agreement are contingent upon, among other things, (i) generation of future taxable income over the term of the Tax Receivable Agreement and (ii) future changes in tax laws. If we do not generate sufficient taxable income in the aggregate over the term of the Tax Receivable Agreement to utilize the tax benefits, then we would not be required to make the related payments under the Tax Receivable Agreement. Although the amount of any payments that must be made under the Tax Receivable Agreement may be significant, the timing of these payments will vary and will generally be limited to one payment per member per year. The amount of such payments are also limited to the extent we utilize the related deferred tax assets. The payments that we are required to make will generally reduce the amount of overall cash flow that might have otherwise been available to us or toSSE Holdings , but we expect the cash tax savings we will realize from the utilization of the related deferred tax assets to fund the required payments.
Summary of Cash Flows
The following table presents a summary of our cash flows from operating, investing and financing activities.
(in thousands) 2022
2021
Net cash provided by operating activities$ 76,741 $
58,402
Net cash used in investing activities (143,424)
(144,890)
Net cash provided by (used in) financing activities (5,202) 242,021 Increase (decrease) in cash and cash equivalents (71,885) 155,533 Cash and cash equivalents at beginning of period 302,406 146,873 Cash and cash equivalents at end of period$ 230,521 $ 302,406 Operating Activities For fiscal 2022, net cash provided by operating activities was$76.7 million compared to$58.4 million for fiscal 2021, an increase of$18.3 million . The increase was primarily due to an$18.5 million increase in net results after excluding non-cash charges, as well as changes in working capital partially offset by an increase in payments on lease liabilities.
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Investing Activities
For fiscal 2022, net cash used in investing activities was$143.4 million compared to$144.9 million for fiscal 2021, a decrease of$1.5 million . This decrease was primarily due to a decrease in net purchases of marketable securities of$42.5 million partially offset by an increase of$41.1 million in capital expenditures to support our real estate development, which includes 21 Shacks under construction as ofDecember 28, 2022 compared to 12 under construction as ofDecember 29, 2021 .
Financing Activities
For fiscal 2022, net cash used in financing activities was$5.2 million compared to net cash provided by financing activities of$242.0 million for fiscal 2021, a decrease of$247.2 million . This decrease was primarily due to$243.8 million in net cash proceeds received in fiscal 2021 from the issuance of the Convertible Notes, net of discount.
Convertible Notes
InMarch 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 onMarch 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 8, Debt, in the accompanying Consolidated Financial Statements included in Part II, Item 8, for additional information.
Revolving Credit Facility
InAugust 2019 , we entered into a Revolving Credit Facility, which matures inMarch 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 . Under the Revolving Credit Facility, outstanding borrowings bear interest at either: (i) LIBOR, or the Secured Overnight Financing Rate upon the discontinuance or unavailability of 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. As ofDecember 28, 2022 andDecember 29, 2021 , 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 ofSSE Holdings and the guarantors. The obligations under the Revolving Credit Facility are guaranteed by each ofSSE 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 ofDecember 28, 2022 , 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 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 8, Debt and Note 9, Leases, in the accompanying Consolidated Financial Statements included in Part II, Item 8 for additional information relating to our long-term debt and operating and financing leases. Liabilities under 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 14, Income Taxes, and Note 17, Commitments and Contingencies, in the accompanying Consolidated Financial Statements included in Part II, Item 8, 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,
Shake Shack Inc. [[Image Removed: shak-20221228_g2.jpg]] Form 10-K | 71
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software acquisition/license commitments and service contracts. The majority of our purchase obligations are due within the next 12 months.
OFF-BALANCE SHEET ARRANGEMENTS
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 other off-balance sheet arrangements as ofDecember 28, 2022 .
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements and related disclosures in conformity withU.S. generally accepted accounting principles ("GAAP") requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and disclose contingent assets and liabilities. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. The critical accounting estimates described below are those that materially affect or have the greatest potential impact on our Consolidated Financial Statements, and involve difficult, subjective or complex judgments made by management. Because of the uncertainty inherent in these matters, actual results may differ from those estimates we use in applying our critical accounting estimates. The following discussion should be read in conjunction with the accompanying Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K.
Valuation of Long-Lived Assets
We assess potential impairments to our long-lived assets, which includes property and equipment and operating lease assets, at least annually or whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of an asset is measured by a comparison of the carrying amount of an asset group to the estimated undiscounted future cash flows expected to be generated by the asset. The evaluation is performed at the lowest level of identifiable cash flows, which is primarily at the individual Shack level. Significant judgment is involved in determining the assumptions used in estimating future cash flows, including projected sales growth, operating margins, economic conditions and changes in the operating environment. Changes in these assumptions could have a significant impact on the recoverability of the asset and may result in additional impairment charges. 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, considering external market participant assumptions.
Leases
We currently lease all of our domestic Company-operated Shacks, the home office,
and certain equipment under various non-cancelable lease agreements. Determining
the probable term for each lease requires judgement by management and can impact
the classification and accounting for a lease as financing or operating, as well
as the period for straight-lined rent expense and the depreciation period for
lease hold improvements.
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 use an incremental borrowing rate ("IBR") in determining
the present value of future lease payments as there are no explicit rates
provided in the leases. The IBR is an estimate based on several factors,
including financial market conditions, comparable company and credit analysis as
well as management judgement. If the IBR was changed, our operating lease assets
and lease liabilities could differ materially.
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Income Taxes
In determining the provision for income taxes for financial statement purposes, we make estimates and judgments which affect our evaluation of the carrying value of our deferred tax assets as well as our calculation of certain tax liabilities. We evaluate the carrying value of our deferred tax assets on a quarterly basis. In completing this evaluation, we consider all available positive and negative evidence. Such evidence includes historical operating results, the existence of cumulative earnings and losses in the most recent fiscal years, taxable income in prior carryback year(s) if permitted under the tax law, expectations for future pre-tax operating income, the time period over which our temporary differences will reverse, and the implementation of feasible and prudent tax planning strategies. Estimating future taxable income is inherently uncertain and requires judgment. 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. Deferred tax assets are reduced by a valuation allowance if, based on the weight of this evidence, it is more likely than not that all or a portion of the recorded deferred tax assets will not be realized in future periods. Concluding that a valuation allowance is not required is difficult when there is significant negative evidence which is objective and verifiable, such as cumulative losses in recent years. As ofDecember 28, 2022 , we are in a three-year cumulative loss position. This is considered significant evidence that is difficult to overcome. However, the three-year cumulative loss position is not solely determinative, and, accordingly, management considers all available positive and negative evidence in our analysis. Although we are in a three-year cumulative loss position as ofDecember 28, 2022 , we have a recent history of earnings prior to the onset of the COVID-19 pandemic. We expect to return to profitability as the effects of the pandemic subside and we begin to generate sufficient taxable income to utilize our deferred tax assets. We have recorded a valuation allowance against certain state tax credits and foreign tax credits that are not expected to be utilized prior to expiration. As ofDecember 28, 2022 , we had$300.5 million of net deferred tax assets, net of valuation allowances. We expect to realize future tax benefits related to the utilization of these assets. However, since future financial results may differ from previous estimates, periodic adjustments to our valuation allowance may be necessary. If we determine in the future that we will not be able to fully utilize all or part of these deferred tax assets, we would record a valuation allowance through earnings in the period the determination was made, which would have an adverse effect on our results of operations and earnings in future periods.
Liabilities Under Tax Receivable Agreement
As described in Note 14, in the accompanying Consolidated Financial Statements included in Part II, Item 8, we are a party to the Tax Receivable Agreement under which we are contractually committed to pay the non-controlling interest holders 85% of the amount of any tax benefits that we actually realize, or in some cases are deemed to realize, as a result of certain transactions. 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. 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. Estimating future taxable income is inherently uncertain and requires judgment. 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. As ofDecember 28, 2022 , we recognized$234.9 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 2022. 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. This determination is based on our estimate of taxable income for the next fiscal year. To the extent our estimate differs from actual results, we may be required to reclassify portions of our liabilities under the Tax Receivable Agreement between current and non-current.Shake Shack Inc. [[Image Removed: shak-20221228_g2.jpg]] Form 10-K | 73
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