8-K: Shake Shack to Close Nine Underperforming Locations, Expects $28-$30 Million in Charges

Shake Shack Inc. announces the closure of nine underperforming locations in California, Ohio, and Texas, resulting in expected pretax charges of $28 to $30 million.

Summary

• Shake Shack has decided to close nine company-owned restaurants due to underperformance.
• These closures are in California, Ohio, and Texas, and are due to changes in the trade area and cannibalization of sales at nearby locations.
• The company expects to record pretax charges between $28 and $30 million in the third quarter of 2024 as a result of these closures.
• Cash costs are estimated to be between $14 and $15.2 million, including lease termination costs, employee-related costs, and other closing expenses.
• Non-cash costs are expected to be between $14 and $14.8 million, primarily from asset impairment, accelerated depreciation, and asset write-offs.
• The closures are expected to be completed by September 25, 2024.
• Affected employees will be offered positions at other locations or receive up to 60 days of pay.

Sentiment

Score: 6

Explanation: The sentiment is neutral to slightly negative due to the significant charges associated with the closures, but this is balanced by the company's efforts to optimize its portfolio and reaffirm its financial guidance. The company is taking action to improve future profitability.

Positives

• The company is optimizing its footprint by closing underperforming locations.
• The closures are not expected to impact the company's plans to open additional locations in these states.
• Management will offer positions to affected employees at neighboring locations.
• Hourly team members will be eligible for rehire at other locations and receive up to 60 days of pay.
• The company is reaffirming its fiscal third quarter 2024 and full-year 2024 guidance.

Negatives

• The company will incur significant pretax charges of $28 to $30 million in Q3 2024.
• Cash costs related to the closures are estimated to be between $14 and $15.2 million.
• Non-cash costs are expected to be between $14 and $14.8 million.
• Nine locations will be closed, impacting employees and potentially customers in those areas.

Risks

• The actual costs of the closures could differ from the current estimates.
• The company's future results could be affected by various factors and uncertainties.
• The closure plan is subject to finalizing third-party agreements and other contingencies.
• There is a risk that the closures may not achieve the desired optimization of the company's footprint.

Future Outlook

The company is reaffirming its fiscal third quarter 2024 and full-year 2024 guidance and does not anticipate closing any additional Shacks based on this evaluation for the foreseeable future. The company's overall growth and strategic priorities have not changed as a result of the announced Shack closures.

Management Comments

• The company regularly evaluates its portfolio of Company-owned and operated Shack restaurants.
• The closures are expected to optimize the company's footprint and maximize profitable growth moving forward.
• Management in these Shacks will be offered a position in neighboring Shacks.
• Hourly team members will be eligible for rehire at other Shacks.

Industry Context

This announcement reflects a common practice in the restaurant industry where companies regularly assess their locations and close underperforming ones to optimize profitability. It is not unusual for restaurant chains to close locations due to changes in trade areas or cannibalization of sales.

Comparison to Industry Standards

• Restaurant chains like McDonald's and Starbucks regularly close underperforming locations as part of their portfolio management strategies.
• The charges associated with these closures are within the typical range for similar actions in the restaurant industry.
• The decision to offer positions to affected employees is a common practice to mitigate the impact of closures on staff.
• The reaffirmation of financial guidance is a positive sign that the company does not expect the closures to significantly impact overall performance.

Stakeholder Impact

• Shareholders will see a one-time charge in Q3 2024, but the closures are intended to improve long-term profitability.
• Employees at the closed locations will be offered positions at other locations or receive up to 60 days of pay.
• Customers at the closed locations will no longer have access to those restaurants.
• Suppliers may see a slight decrease in orders from the closed locations.

Next Steps

• The company will finalize third-party agreements related to the closures.
• The company will complete the closure of the nine locations by September 25, 2024.
• The company will offer positions to affected employees at neighboring locations.
• The company will continue to evaluate its portfolio of restaurants.

Key Dates

Keywords

restaurant closures, underperforming locations, pretax charges, lease termination costs, asset impairment, Shake Shack, restaurant industry, financial results