Shake Shack Inc.: Form 10-Q for the period ended Sep 27, 2023

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," "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-Q in the context of the risks and uncertainties disclosed in our Annual Report on Form 10-K for the fiscal year ended December 28, 2022 ("2022 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 2022 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 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.

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 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.

“System-wide sales” is an operating measure and consists of sales from the Company's domestic Company-operated Shacks, domestic licensed Shacks and international licensed Shacks. The Company does not recognize the sales from licensed Shacks as revenue. Of these amounts, revenue is limited to licensing revenue based on a percentage of sales from domestic and international licensed Shacks, as well as certain up-front fees, such as territory fees and opening fees.

As of September 27, 2023, there were 495 Shacks in operation system-wide, of which 280 were domestic Company-operated Shacks, 39 were domestic licensed Shacks and 176 were international licensed Shacks.

Recent Business Trends

Same-Shack sales for the thirteen weeks ended September 27, 2023 increased 2.3% compared to the same period last year, driven by a 6.5% increase in price mix partially offset by a 4.2% decrease in guest traffic. Compared to the same period last year, same-Shack sales at suburban Shacks increased 3.7% while urban Shacks increased 1.0%. Same-Shack sales during the thirteen weeks ended September 27, 2023 slowed when compared to the thirteen weeks ended June 28, 2023, driven by decreased guest traffic across urban and suburban Shacks partially offset by price mix. For the purpose of calculating same-Shack sales for the thirteen weeks ended September 27, 2023, Shack sales for 202 Shacks were included in the comparable Shack base.

Average weekly sales were $74,000 for the thirteen weeks ended September 27, 2023 compared to $73,000 in the same period last year, primarily driven by higher menu prices, partially offset by a decline in guest traffic. Average weekly sales decreased 3.9%, compared to the thirteen weeks ended June 28, 2023, driven by a decline in guest traffic across all domestic Company-operated Shacks partially offset by price mix.

Shake Shack Inc. Form 10-Q | 27

System-wide sales for the thirteen weeks ended September 27, 2023 increased 24.3% to $438.9 million compared to the same period last year and increased 2.9% compared to the thirteen weeks ended June 28, 2023.

Digital sales for the thirteen weeks ended September 27, 2023 increased 5.4% to $83.2 million compared to the same period last year and decreased 4.3% compared to the thirteen weeks ended June 28, 2023. Total digital sales includes orders placed on the Shake Shack app, website and third-party delivery platforms, which represented 31.4% of Shack sales during the thirteen weeks ended September 27, 2023.

Development Highlights

During the third quarter of 2023, we opened 10 new domestic Company-operated Shacks, four new domestic licensed Shacks and 11 new international licensed Shacks. There was one permanent international licensed Shack closure in the third quarter of 2023.

28 | Shake Shack Inc. Form 10-Q

RESULTS OF OPERATIONS

The following table summarizes our results of operations for the thirteen and thirty-nine weeks ended September 27, 2023 and September 28, 2022:

(dollar amounts in thousands)

(1) As a percentage of Shack sales.

(2) The Company elected to reclassify certain marketing expenses for prior periods to conform with the presentation for the thirteen and thirty-nine weeks ended September 27, 2023. These reclassifications had no effect on previously reported Net Loss. For the thirteen and thirty-nine weeks ended September 28, 2022, the Company reclassified $286 and $764, respectively, from Other operating expenses to General and administrative expenses in the accompanying Condensed Consolidated Financial Statements.

Shack Sales

Shack sales represent the aggregate sales of food, beverages and Shake 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)

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Shack sales for the thirteen weeks ended September 27, 2023 increased 20.7% to $265.0 million versus the same period last year. The increase was primarily due to the opening of 48 new domestic Company-operated Shacks between September 28, 2022 and September 27, 2023, which contributed $40.7 million, as well as increased menu prices, which contributed $20.0 million, partially offset by a decline in guest traffic.

Shack sales for the thirty-nine weeks ended September 27, 2023 increased 20.6% to $771.0 million versus the same period last year. The increase was primarily due to the opening of 48 new domestic Company-operated Shacks between September 28, 2022 and September 27, 2023, which contributed $86.7 million, as well as increased menu prices, which contributed $55.0 million, partially offset by a decrease in items per check.

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)

Licensing revenue for the thirteen weeks ended September 27, 2023 increased 35.1% to $11.2 million versus the same period last year. Licensing revenue for the thirty-nine weeks ended September 27, 2023 increased 33.8% to $30.2 million versus the same period last year. The increases in Licensing revenue for the thirteen and thirty-nine weeks ended September 27, 2023 were primarily due to the opening of 45 net new licensed Shacks between September 28, 2022 and September 27, 2023, which contributed $1.9 million and $4.1 million, respectively, 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, change with sales volume, are impacted by menu mix, channel mix and fluctuations in commodity costs, as well as geographic scale and proximity.

(dollar amounts in thousands)

Food and paper costs for the thirteen weeks ended September 27, 2023 increased 13.9% to $77.2 million versus the same period last year. Food and paper costs for the thirty-nine weeks ended September 27, 2023 increased 16.1% to $224.8 million versus the same period last year. The increases for the thirteen and thirty-nine weeks ended September 27, 2023 were primarily due to the opening of 48 new domestic Company-operated Shacks between September 28, 2022 and September 27, 2023, which contributed approximately $12.2 million and $28.0 million, respectively.

As a percentage of Shack sales, the decreases in Food and paper costs for the thirteen and thirty-nine weeks ended September 27, 2023 were primarily driven by menu price increases partially offset by increased commodity costs, particularly in beef and fries.

Labor and Related Expenses

Labor and related expenses include domestic Company-operated Shack-level hourly and management wage rates, 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)

Labor and related expenses for the thirteen weeks ended September 27, 2023 increased 17.9% to $76.2 million versus the same period last year. Labor and related expenses for the thirty-nine weeks ended September 27, 2023 increased 18.2% to $225.7 million versus the same period last year. The increases for the thirteen and thirty-nine weeks ended September 27, 2023 were primarily due to the opening of 48 new domestic Company-operated Shacks between September 28, 2022 and September 27, 2023.

As a percentage of Shack sales, the decreases in Labor and related expenses for the thirteen and thirty-nine weeks ended September 27, 2023 were primarily due to labor efficiencies and sales leverage partially offset by increased wages.

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)

Other operating expenses for the thirteen weeks ended September 27, 2023 increased 10.8% to $37.3 million versus the same period last year. Other operating expenses for the thirty-nine weeks ended September 27, 2023 increased 12.9% to $108.4 million versus the same period last year. The increases for the thirteen and thirty-nine weeks ended September 27, 2023 were primarily driven by higher facilities costs, mainly utilities, due to the opening of 48 new domestic Company-operated Shacks between September 28, 2022 and September 27, 2023 as well as increased transaction costs associated with higher sales.

As a percentage of Shack sales, the decrease in Other operating expenses for the thirteen weeks ended September 27, 2023 was primarily driven by decreased repair and maintenance expenses, lower delivery commissions due to a shift in channel mix and sales leverage. As a percentage of Shack sales, the decrease in Other operating expenses for the thirty-nine weeks ended September 27, 2023 was primarily driven by lower delivery commissions as a result of a shift in channel mix, lower repair and maintenance expenses and sales leverage.

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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.

(dollar amounts in thousands)

Occupancy and related expenses for the thirteen weeks ended September 27, 2023 increased 17.1% to $20.3 million versus the same period last year. Occupancy and related expenses for the thirty-nine weeks ended September 27, 2023 increased 16.7% to $58.7 million versus the same period last year. The increases for the thirteen and thirty-nine weeks ended September 27, 2023 were primarily due to the opening of 48 new domestic Company-operated Shacks between September 28, 2022 and September 27, 2023, which contributed $2.4 million and $5.4 million, respectively.

As a percentage of Shack sales, the decrease in Occupancy and related expenses for the thirteen weeks ended September 27, 2023 was primarily driven by a decrease in base rent and sales leverage. As a percentage of Shack sales, the decrease in Occupancy and related expenses for the thirty-nine weeks ended September 27, 2023 was primarily due to sales leverage and lower base rent, partially offset by an increase in common area maintenance charges.

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)

General and administrative expenses for the thirteen weeks ended September 27, 2023 increased 14.9% to $30.9 million versus the same period last year. General and administrative expenses for the thirty-nine weeks ended September 27, 2023 increased 6.7% to $93.7 million versus the same period last year. The increase in General and administrative expenses for the thirteen weeks ended September 27, 2023 was primarily due to increased wages and other team costs as well as investments in marketing and technology initiatives. The increase in General and administrative expenses for the thirty-nine weeks ended September 27, 2023 was primarily due to increased wages and other team costs, professional fees related to a non-recurring matter of $2.3 million as well as investments in marketing and technology initiatives, partially offset by lower legal expenses compared to the prior year period.

As a percentage of Total revenue, the decreases in General and administrative expenses for the thirteen and thirty-nine weeks ended September 27, 2023 were 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.

(dollar amounts in thousands)

Depreciation and amortization expense for the thirteen weeks ended September 27, 2023 increased 24.0% to $23.1 million versus the same period last year. Depreciation and amortization expense for the thirty-nine weeks ended September 27, 2023 increased 24.5% to $66.7 million versus the same period last year. The increases in Depreciation and amortization expense for the thirteen and thirty-nine weeks ended September 27, 2023 were predominantly due to incremental depreciation of capital expenditures related to the opening of 48 new domestic Company-operated Shacks and technology projects placed into service between September 28, 2022 and September 27, 2023.

As a percentage of Total revenue, the increases in Depreciation and amortization expense for the thirteen and thirty-nine weeks ended September 27, 2023 were primarily due to the aforementioned items.

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 the New York City metropolitan area, where we have greater economies of scale and incur lower travel and lodging costs for our training team.

(dollar amounts in thousands)

Pre-opening costs for the thirteen weeks ended September 27, 2023 increased 63.4% to $5.0 million versus the same period last year. Pre-opening costs for the thirty-nine weeks ended September 27, 2023 increased 64.4% to $14.1 million versus the same period last year. The increase in Pre-opening costs for the thirteen weeks ended September 27, 2023 was primarily due to increased wages and benefits for our Shack teams related to the timing of Shack openings throughout the year, legal costs and travel costs, partially offset by a decrease in occupancy expense related to the timing of Shack openings throughout the year, compared to the prior-year period. The increase in Pre-opening costs for the thirty-nine weeks ended September 27, 2023 was primarily due to increases in wages and benefits for our Shack teams and occupancy expense related to the timing of Shack openings throughout the year, legal costs and smallwares compared to the prior-year period.

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

Shake Shack Inc. Form 10-Q | 33 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)

Impairment and loss on disposal of assets for the thirteen weeks ended September 27, 2023 decreased 16.9% to $0.5 million versus the same period last year. Impairment and loss on disposal of assets for the thirty-nine weeks ended September 27, 2023 increased 23.6% to $2.1 million versus the same period last year. The decrease in Impairment and loss on disposal of assets for the thirteen weeks ended September 27, 2023 was primarily due to a reduction in abandoned construction projects in the current year compared to the prior year. The increase in Impairment and loss on disposal of assets for the thirty-nine weeks ended September 27, 2023 was primarily due to the number of Shacks maturing in our base as well as disposal of home office assets.

Other Income, Net

Other income, net consists primarily 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)

Other income, net for the thirteen weeks ended September 27, 2023 increased to $3.4 million from $1.5 million. Other income, net for the thirty-nine weeks ended September 27, 2023 increased to $9.5 million from $1.7 million. The increases in Other income, net for the thirteen and thirty-nine weeks ended September 27, 2023 were primarily due to an increase in income from cash equivalents of $1.2 million and $6.2 million, respectively, from increased 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)

Interest expense for the thirteen weeks ended September 27, 2023 decreased 8.8% to $0.4 million versus the same period last year. Interest expense for the thirty-nine weeks ended September 27, 2023 increased 8.4% to $1.2 million versus the same period last year. The decrease in Interest expense for the thirteen weeks ended September 27, 2023 was primarily due to decreased various sales tax audit assessment charges, partially offset by increased finance lease charges. The increase in Interest expense for the thirty-nine weeks ended September 27, 2023 was primarily due to increased finance lease charges.

Income Tax Expense (Benefit)

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.

(dollar amounts in thousands)

Our effective income tax rates for the thirteen weeks ended September 27, 2023 and September 28, 2022 were 6.1% and 39.5%, respectively. The decrease was primarily driven by the change in pre-tax income and the impact of permanent differences and discrete expense on pre-tax income for the period compared to pre-tax loss for the same period last year. The Company's ownership interest in SSE Holdings is directly related to its share of the taxable income (loss) of SSE Holdings. Our weighted average ownership interest in SSE Holdings was 93.3% and 93.2% for the thirteen weeks ended September 27, 2023 and September 28, 2022, respectively.

Our effective income tax rates for the thirty-nine weeks ended September 27, 2023 and September 28, 2022 were 11.3% and 25.5%, respectively. The decrease was primarily driven by the change in pre-tax income and the effect of permanent differences, primarily tax credits, on pre-tax income for the period compared to pre-tax loss for the same period last year, as well as a decrease in expense due to tax benefits related to certain windfalls in equity-based compensation. The decrease was partially offset by an increase in the Company's ownership interest in SSE Holdings which increased its share of the taxable income (loss) of SSE Holdings. Our weighted average ownership interest in SSE Holdings was 93.3% and 93.1% for the thirty-nine weeks ended September 27, 2023 and September 28, 2022, respectively.

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.

(dollar amounts in thousands)

Net income (loss) attributable to non-controlling interests for the thirteen weeks ended September 27, 2023 improved to income of $0.5 million from a loss of $0.3 million in the same period last year. Net income (loss) attributable to non-controlling interests for the thirty-nine weeks ended September 27, 2023 improved to income of $0.7 million from a loss of $1.5 million in the same period last year. The improvements in Net income (loss) attributable to non-controlling interests for the thirteen and thirty-nine weeks ended September 27, 2023 were primarily due to an increase in net results compared to the same periods last year, partially offset by a decrease in the non-controlling interest holders' weighted average ownership, which was 6.7% for the thirteen

Shake Shack Inc. Form 10-Q | 35 and thirty-nine weeks ended September 27, 2023 and 6.8% and 6.9%, respectively for the thirteen and thirty-nine weeks ended September 28, 2022.

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: Shack-level operating profit, Shack-level operating 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").

Shack-Level Operating Profit

Shack-level operating profit, also referred to as restaurant 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 Income (loss) from Operations, the most directly comparable GAAP financial measure, is as follows.

(dollar amounts in thousands)

(1) The Company has elected to reclassify certain marketing expenses from Other operating expenses to General and administrative expenses in the accompanying Condensed Consolidated Financial Statements for prior periods to be comparable with the classification for the thirteen and thirty-nine weeks ended September 27, 2023.

(2) For the thirty-nine weeks ended September 28, 2022, Shack-level operating profit margin includes a $1,281 cumulative catch-up adjustment for gift card breakage income, recognized in Shack sales.

(3) 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 (benefit) 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.

In the first quarter of 2023, the Company revised its definition of Adjusted EBITDA to exclude deferred lease costs and executive transition costs as adjustments to the measure. The Company believes excluding both of these items improves the usefulness of Adjusted EBITDA as these items are characteristic of the Company’s ongoing operations and such presentation is consistent with other companies in the restaurant industry. Previously reported periods have been revised to conform to the current period presentation.

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.

Shake Shack Inc. Form 10-Q | 37

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.

(dollar amounts in thousands)

(1) Related to professional fees for a non-recurring matter.

(2) Calculated as a percentage of Total revenue, which was $276.2 million and $801.3 million for the thirteen and thirty-nine weeks ended September 27, 2023, respectively, and $227.8 million and $662.0 million for the thirteen and thirty-nine weeks ended September 28, 2022, 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.

In the first quarter of 2023, the Company revised its definition of Adjusted Pro Forma Net Income to exclude executive transition costs as an adjustment to the measure. Previously reported periods have been revised to conform to the current period presentation. See "EBITDA and Adjusted EBITDA" above for additional information.

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 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.

Shake Shack Inc. Form 10-Q | 39

(in thousands, except per share amounts)

(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. Refer to Note 11, Earnings (Loss) per Share, in the accompanying Condensed Consolidated Financial Statements, for additional information.

(2) Related to professional fees for a non-recurring matter.

(3) Represents the tax effect of the aforementioned adjustments and pro forma adjustments to reflect corporate income taxes at assumed effective tax rates of 15.1% and 20.5% for the thirteen and thirty-nine weeks ended September 27, 2023, respectively, and 39.2% and 28.8% for the thirteen and thirty-nine weeks ended September 28, 2022, 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.

(4) 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.

LIQUIDITY AND CAPITAL RESOURCES

Sources and Uses of Cash

Our primary sources of liquidity are cash from operations, cash and cash equivalents on hand, and availability under our Revolving Credit Facility. As of September 27, 2023, we maintained a Cash and cash equivalents balance of $190.0 million. 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 September 27, 2023, such obligations totaled $235.6 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.

(in thousands)

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Operating Activities

For the thirty-nine weeks ended September 27, 2023, net cash provided by operating activities was $90.6 million compared to $54.3 million for the thirty-nine weeks ended September 28, 2022, an increase of $36.3 million. The increase was primarily driven by a $43.4 million improvement in net results after excluding non-cash charges, partially offset by changes in working capital of $7.2 million. The changes in working capital included an increase in payments on lease liabilities, net of tenant improvement receipts and the timing and payments of legal settlements, partially offset by a decrease in the construction in progress accruals due to the timing of shack openings this period compared to the same period last year.

Investing Activities

For the thirty-nine weeks ended September 27, 2023, net cash used in investing activities was $126.3 million compared to $95.2 million for the thirty-nine weeks ended September 28, 2022, an increase of $31.1 million. This increase was primarily due to a net increase in marketable securities activity as a result of the purchase of held-to-maturity debt securities of $94.0 million partially offset by the sale of equity securities of $81.5 million, and an increase of $18.2 million in capital expenditures to support our real estate development.

Financing Activities

For the thirty-nine weeks ended September 27, 2023, net cash used in financing activities was $4.8 million compared to $4.5 million for the thirty-nine weeks ended September 28, 2022, an increase of $0.3 million. This increase was primarily due to an increase in withholding taxes related to the vesting of equity awards, partially offset by an increase in proceeds from stock option exercises and a decrease in distributions paid to non-controlling interest holders.

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.

During the thirteen weeks ended September 27, 2023, the Company entered into the fourth amendment to the Revolving Credit Facility ("Fourth Amendment"), which, among other things, modifies 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 September 27, 2023 and December 28, 2022, 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 September 27, 2023, 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.

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 28, 2022.

Recently Issued Accounting Pronouncements

Refer to Note 2, Summary of Significant Accounting Policies under Part I, Item 1 of this Form 10-Q.

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 28, 2022.

DISCLOSURE CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of such date. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

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CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There were no changes to our internal control over financial reporting that occurred during the quarter ended September 27, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

There have been no material changes to the risk factors disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 2022.