Edgar Filing: Shake Shack Inc.

SHAK-20171227_10K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K



	(Mark One)
	þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 27, 2017
OR
	o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ______
Commission file number: 001-36823

SHAKE SHACK INC.

(Exact name of registrant as specified in its charter)



Delaware			47-1941186
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)
24 Union Square East, 5th Floor, New York, New York			10003
(Address of principal executive offices)			(Zip Code)
(646) 747-7200
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class			Name of exchange on which registered
Class A Common Stock, par value $0.001			New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. o Yes þ No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes þ No

Indicate by check mark if the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule-405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). þ Yes o No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act.



Large accelerated filer	þ		Accelerated filer	o
Non-accelerated filer	o	(Do not check if a smaller reporting company)	Smaller reporting company	o
			Emerging growth company	o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standard provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). o Yes þ No

The aggregate market value of the voting and non-voting stock held by non-affiliates of the Registrant, as of June 28, 2017, the last business day of the Registrant’s most recently completed second fiscal quarter, was approximately $778,146,403, computed using the closing price on that day of $35.64. Solely for purposes of this disclosure, shares of common stock held by members part of the Voting Group pursuant to to the Stockholders Agreement, as amended, of the Registrant as of such date have been excluded because such persons may be deemed to be affiliates. This determination of affiliates is not necessarily a conclusive determination for any other purposes.

As of February 14, 2018, there were 27,078,149 shares of Class A common stock outstanding and 9,701,815 shares of Class B common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement for its 2018 Annual Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K.

SHAKE SHACK INC.

TABLE OF CONTENTS



Cautionary Note About Forward-Looking Statements			1

Part I			2
	Item 1.	Business	2
	Item 1A.	Risk Factors	20
	Item 1B.	Unresolved Staff Comments	41
	Item 2.	Properties	42
	Item 3.	Legal Proceedings	43
	Item 4.	Mine Safety Disclosures	43

Part II			44
	Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	44
	Item 6.	Selected Financial Data	46
	Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	48
	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	69
	Item 8.	Financial Statements and Supplementary Data	70
	Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	119
	Item 9A.	Controls and Procedures	119
	Item 9B.	Other Information	119

Part III			120
	Item 10.	Directors, Executive Officers and Corporate Governance	120
	Item 11.	Executive Compensation	120
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	120
	Item 13.	Certain Relationships and Related Transactions, and Director Independence	120
	Item 14.	Principal Accounting Fees and Services	120

Part IV			121
	Item 15.	Exhibits and Financial Statement Schedules	121

SIGNATURES			124
EXHIBIT INDEX			122

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Cautionary Note About Forward-Looking Information

This Annual Report on Form 10-K ("Form 10-K") contains 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. All statements other than statements of historical fact are forward-looking statements. Many of the forward-looking statements are located in Part II, Item 7 of this Form 10-K under the headings "Management's Discussion and Analysis of Financial Condition and Results of Operations", including, but not limited to, expected financial outlook for fiscal year 2018, expected Shack openings, expected same-Shack sales growth and trends in our business. Forward-looking statements discuss our current expectations and projections relating to our financial position, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as "aim," "anticipate," "believe," "estimate," "expect," "forecast," "outlook," "potential," "project," "projection," "plan," "intend," "seek," "may," "could," "would," "will," "should," "can," "can have," "likely," the negatives thereof and other similar expressions.

While we believe that our assumptions are reasonable, it is very difficult to predict the impact of known factors, and it is impossible to anticipate all factors that could affect our actual results. 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," which are incorporated herein by reference.

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 or revise 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. We qualify all of our forward-looking statements by these cautionary statements.

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Part I

Item 1. Business.

Shake Shack Inc. was formed on September 23, 2014 as a Delaware corporation. Shake Shack Inc. Class A common stock trades on the New York Stock Exchange under the symbol "SHAK." Unless the context otherwise requires, "we," "us," "our," "Shake Shack," the "Company" and other similar references refer to Shake Shack Inc. and, unless otherwise stated, all of its subsidiaries, including SSE Holdings, LLC, which we refer to as "SSE Holdings."

INITIAL PUBLIC OFFERING AND ORGANIZATIONAL TRANSACTIONS

On February 4, 2015, we completed an initial public offering ("IPO") of 5,750,000 shares of our Class A common stock at a public offering price of $21.00 per share, which includes 750,000 shares issued pursuant to the underwriters' over-allotment option. We received $112.3 million in proceeds, net of underwriting discounts and commissions, which we used to purchase newly-issued membership interests from SSE Holdings at a price per interest equal to the initial public offering price of our Class A common stock of $21.00.

Shake Shack is a holding company with no direct operations and our principal asset is our equity interest in SSE Holdings. In connection with the IPO, we completed a series of organizational transactions including the following:

▪

We amended and restated the limited liability company agreement of SSE Holdings (as amended, the "SSE Holdings LLC Agreement") to, among other things, (i) provide for a new single class of common membership interests in SSE Holdings ("LLC Interests"), (ii) exchange all of the membership interests of the then-existing holders of SSE Holdings for LLC Interests and (iii) appoint Shake Shack as the sole managing member of SSE Holdings;

▪

We amended and restated our certificate of incorporation to, among other things, (i) provide for Class B common stock with voting rights but no economic interests (where “economic interests” means the right to receive any distributions or dividends, whether cash or stock, in connection with common stock) and (ii) issue shares of Class B common stock to the then-existing members of SSE Holdings on a one-to-one basis with the number of LLC Interests they own;


▪	We acquired, by merger, two entities that were owned by former indirect members of SSE Holdings, for which we issued 5,968,841 shares of Class A common stock as merger consideration (the "Mergers").

See Note 1 to the consolidated financial statements included in Part II, Item 8 for more information about the above-mentioned transactions as well as the other transactions completed in connection with our IPO, which we refer to collectively as the "Organizational Transactions." As of December 27, 2017, Shake Shack Inc. owned 72.1% of SSE Holdings and the non-controlling interest holders owned the remaining 27.9% of SSE Holdings.

OVERVIEW

Shake Shack is a modern day "roadside" burger stand serving a classic American menu of premium burgers, hot dogs, crispy chicken, frozen custard, crinkle cut fries, shakes, beer, wine and more. Originally founded by Danny Meyer's Union Square Hospitality Group ("USHG"), which owns and operates some of New York City's most acclaimed and popular restaurants—Union Square Cafe, Gramercy Tavern, Blue Smoke, The Modern at the Museum of Modern Art, Maialino, North End Grill, Untitled, Marta, Martina and Daily Provisions—Shake Shack originated as a hot dog cart in 2001 to support the rejuvenation of New York City's Madison Square Park through its Conservancy's first art installation, "I Y Taxi." The hot dog cart was an instant success, with lines forming daily throughout the summer months for the next three years. In response, the city's Department of Parks and Recreation awarded Shake

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Shack a contract to create a kiosk to help fund the park's future. In 2004, Shake Shack officially opened and immediately became a community gathering place for New Yorkers and visitors from all over the world and has since become a beloved New York City institution, garnering significant media attention, critical acclaim and a passionately-devoted following. Since its inception, Shake Shack has grown rapidly—with 159 Shacks, as of December 27, 2017, in 11 countries and 20 states, as well as the District of Columbia—and we continue to expand outside our home market bringing the Shake Shack experience to new customers around the world.

THE SHACK PACT

Our commitment to the Shack Pact is stronger than ever. This is the agreement that our team makes at Shake Shack to lead our company with integrity, with purpose and with intention. It’s our mission and vision. Quite simply: it’s What We Do and Who We Are and it’s the ethos of our work each and every day as we grow Shake Shack. The Shack Pact™ is prominently displayed in the team member areas of every Shack, on the inside cover of the Shackademics™ book (our training manual) and acts as the template for every pre-meal meeting agenda (daily Shack team meeting).

WHAT WE DO:

We Stand For Something Good

WHO WE ARE:

We Are Boundless Hospitality

Hospitality is in our DNA. We take great pride in our culture and believe that it is the single most important factor in our success. Our mission to Stand For Something Good^® permeates throughout every Shack we build, every ingredient we source and every team member we hire. We take care of each other first and foremost so that we can take care of our guests, our community, our suppliers and our investors. We aim to recruit people who have integrity, who are warm, friendly, motivated, caring, self-aware and intellectually curious—what we call "51%'ers." We use the term "51%" to describe the inherent interpersonal and emotional skills needed to thrive on the job and "49%" to describe the technical skills needed for the job. Our 51%'ers are excited and committed to champion performance, remarkable and enriching hospitality, embodying our culture, and actively growing themselves and the brand. Danny Meyer's original vision of Enlightened Hospitality™ guided the creation of the unique Shake Shack culture that, we believe, creates a differentiated experience for our guests at each of our Shacks around the world. Our team is trained to understand and practice the values of Enlightened Hospitality: caring for each other, caring for our guests, caring for our community, caring for our suppliers and caring for our investors. These principles have been championed by Danny Meyer throughout his career and are detailed in his New York Times best-selling book Setting the Table: The Transforming Power of Hospitality in Business, and they are fundamental to the way we operate our business.

The Bigger We Get, the Smaller We Act

With every passing year, this mantra continues to drive and challenge our strategy. As we continue to grow, it's more important than ever that we cherish our roots, continue the ethos that led to the creation of Shake Shack and to never veer from our original vision. We make decisions that focus on the core of who we are, staying true to our mission to Stand For Something Good and the principles of Enlightened Hospitality. These principles drive us to seek out the finest team members, the tastiest ingredients, the best suppliers and the best community partners.

Hospitality in the Digital Age

Shake Shack is devoted to its digital future, pursuing innovation in technology that seeks to create an active dialogue with our guests, drive higher engagement and raise the bar on operational excellence and overall guest experience.

An essential part of Shake Shack digital is the Shack App. Launched in 2017, the Shack App is our first-ever mobile ordering app-available on both IOS and Android nationwide. With the Shack App, we’re able to meet our guests where they are and provide them

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a whole new way to experience Shake Shack. The Shack App was developed to elevate the in-Shack experience, aiming to provide shorter pick-up times and convenient mobile ordering. Guests can now order Shake Shack when they want it right from their phone, and it will be cooked-to-order and timed to their arrival. The Shack App features all our menu classics—all-natural beef burgers, flat-top dogs, chicken sandwiches, frozen custard, crinkle cut fries and more—and includes all the mobile ordering essentials: guests can pick from their favorite orders; keep track of food allergies; access nutritional information; see the latest events and promos; connect to all Shake Shack social media channels and share feedback. In 2017 our Shack App was awarded with an Appy Award by MediaPost for best app in the restaurants, food and beverage category, and was also a W³Silver Award winner in the food and beverage category.

Shake Shack continues to seek out ways to innovate in the digital space and raise the bar on hospitality. In August 2017, we launched the Shake Shack chatbot. With the ability to answer guests’ most frequently asked questions in-channel on Twitter and Facebook and online at shakeshack.com, the ShackBot is another example of our commitment to creating a premium guest experience. Guests are now able to engage with the bot to learn more about the menu, featured items, nutritional information, hours and more. Guests are also invited to provide feedback and granted easy access to download the Shack App and sticker package.

In October 2017, we introduced our first kiosk-only ordering, cashless environment at our Astor Place Shack in New York City. The Shack kiosk was developed with an enhanced guest experience in mind, allowing us to serve more people at peak times—whether in-Shack, for pickup via the Shack App or even delivery—resulting in fewer lines, less wait time and less friction at every channel. The Shack kiosk replicates the experience of the Shack App with a sharp aesthetic, an intuitive touch screen interface and ease of ordering. Guests simply select their food, place an order and choose to receive an alert via text when their order is ready. Hospitality Champs are stationed around the kiosks to assist guests with their orders and answer any questions.

We continue to explore delivery as a way to bring Shake Shack to our guests wherever they are and whenever they want. As an essential part of how consumers eat today, delivery presents a unique opportunity to reach even more people and allow them to engage with Shake Shack on their terms. In 2017 we conducted delivery pilots with several potential partners. We also created and tested new packaging. We learned about our various Shacks' ability to handle delivery at peak times and gained perspective on the capabilities of delivery partners and the benefits of systems integration. We expect that our thoughtful, strategic approach to delivery will result in an overall better Shake Shack experience for our guests.

Technology touches all aspects of our business—we embrace it and know it to be an invaluable vehicle for enhancing guest experience and hospitality across all touchpoints.

We Are a Team: We Take Care of Each Other

Our people make all the difference. More than ever, it’s incredibly important to invest in our team. We believe the unity that we have built amongst our Shack teams and across the Company as a whole is a key driver of our ability to deliver a great guest experience and, therefore, continue to successfully grow our footprint. We seek to be the employer of choice by offering competitive wages, comprehensive benefits and a variety of incentive programs. As wages rise across all income levels, we continue to play offense to compensate our team at the right wage for their long term development. We believe that team members who are treated and trained well will deliver Enlightened Hospitality and a superior guest experience. Through our leadership development programs, we teach our team members the principles of Enlightened Hospitality and how to live and breathe our Shack Pact, the agreement that encompasses our value system and brand ethos. Ultimately, we know when we have the best team, we will reach our stated goals.

Leaders Training Future Leaders

We invest in our team through extensive leadership development programs to ensure that Shake Shack remains a great place to work and a real career choice for team members at every level. We have built a culture of active learning and we foster an environment of leadership development throughout the entire life cycle of employment. We believe that our culture of Enlightened Hospitality enables us to develop future leaders from within and deliver a consistent Shack experience as our team continues to grow.

The Shacksperience and Steppin' Up Model

The goal of our training programs is to develop leaders and to cross-utilize team members throughout our operations. We call our team member life cycle and overall employment experience, The Shacksperience™. The Steppin' Up Model is the growth model

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for Shake Shack employees which defines the steps in the employment life cycle, beginning with the team member position and working up through the general manager position. It clarifies the eligibility requirements and training necessary for each position, outlines the growth opportunities at all levels of the organization and furthers our philosophy of "leaders training future leaders." By creating this visual model, employees have a clear view of the career progression for a Shack employee, which in turn helps foster communication in achieving these goals. We train our culture and guiding principles first, then move to menu knowledge, followed by a focus on operational training. We believe that everyone learns differently and our training programs use various formats: online interactive, video, hands-on and paper-based. Every team member has access to ShackSource™, our proprietary online training portal, which is used not only as a learning platform, but also as a communication tool for our team. ShackSource also allows team members to send recognition messages, comments, praise and thanks to their fellow team members across the Company.

We care about our team and want to set them up for success in the future, both at Shake Shack and in their careers. We continue to invest in training materials that teach our team members how to reach the next step of the Steppin' Up Model. We've also developed training manuals on how to become a leader at Shake Shack. These training manuals lay out the specific certifications, procedures and modules each team member needs to complete in order to move up to the next level. Our shift manager position, a level between a team member and manager, allows team members to be introduced to certain managerial-level skills before making the full transition to manager. We are incredibly proud of the number of leaders who continue to graduate from hourly roles to shift managers, and on up the ladder of Shack leadership.

We Are Fine Casual: Inspired Food and Drink

We embrace our fine-dining heritage and are committed to sourcing premium, sustainable ingredients, such as all-natural, hormone and antibiotic-free beef, chicken and bacon, while offering excellent value to our guests. Our core menu remains focused, and is supplemented with targeted innovation inspired by the best versions of the classic American roadside burger stand. Always focused on culinary creativity and excellence, we collaborate with award-winning chefs, talented bakers, farmers and artisanal purveyors who work with us in different and engaging ways. We never stop looking for the best ingredients and the best culinary partners in order to exceed our guests' expectations in every aspect of their experience. As we grow across the country, we are excited to collaborate even more with the talented chefs and suppliers who are leading our industry.

Our signature items are our all-natural, hormone and antibiotic-free burgers, hot dogs, crispy chicken, crinkle cut fries, shakes and frozen custard. We cook our burgers and spin our shakes to order and strive to use the freshest premium ingredients available.

Our Menu

Our menu focuses on premium food and beverages, carefully crafted from a range of classic American foods at more accessible price points than full-service restaurants. The Shake Shack concept and core menu items have not materially changed since 2004, which speaks to the timeless and universal appeal of our food offerings.



	Burgers & Chicken
	Our burgers are made with a proprietary whole-muscle blend of 100% all-natural, hormone and antibiotic-free Angus beef, ground fresh daily, cooked to order and served on a non-GMO potato bun. We take great care in the preparation of our burgers—from sourcing, to handling, to cooking—to ensure that the taste and quality of the burgers we serve is second to none. Our signature burger is the ShackBurger^®, which is a four-ounce cheeseburger topped with lettuce, tomato and ShackSauce™. Our burger offerings also include the SmokeShack^®, 'Shroom Burger™ (our vegetarian burger), Shack Stack^® and Hamburger. Our Chick’n Shack™ is a 100% all-natural, hormone and antibiotic-free cage-free chicken breast, slow cooked in buttermilk herbs, hand-battered, hand-breaded and crisp-fried to order. In January 2018, we were also proud to announce our limited time offer menu, the Griddled Chick'n Club.
	Crinkle Cut Fries
	Our classic and passionately loved crinkle cut fries are made from premium Yukon potatoes and are prepared 100% free of artificial trans-fat. Guests can also enjoy our Cheese Fries, which are our crinkle cut fries topped with a proprietary blend of cheddar and American cheese sauce. We believe the tactile pleasure and emotional attachment that our guests have to the crispiness and ridges of our crinkle cut fries is a nostalgic ode to the roadside burger stand of yesteryear.

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	Hot Dogs
	Shake Shack was born from a hot dog cart in 2001 and we believe that our hot dog category gives our guests another premium category from which to choose. Both our beef hot dogs and our chicken dogs are made from 100% all-natural, hormone and antibiotic-free beef and chicken. Our signature Shack-cago Dog^® is our nod to the classic Chicago-style hot dog, topped with Shack relish, onion, cucumber, pickle, tomato, sport pepper, celery salt and mustard.
	Frozen Custard
	Our premium, dense, rich and creamy ice cream, hand-spun daily on-site, is crafted from our proprietary vanilla and chocolate recipes using only real sugar (no corn syrup) and milk from dairy farmers who pledge not to use artificial growth hormones. Shakes remain our guests' favorite in this category and are scooped and spun to order. Our concretes are made by blending frozen custard at high speed with premium mix-ins. Since each Shake Shack intends to engage its community, each Shack has signature concretes, distinct to its location, that use locally-sourced mix-ins made by artisanal producers whenever possible.
	Beer, Wine and Beverages
	Our proprietary ShackMeister^® Ale, brewed by Brooklyn Brewery, was specifically crafted to complement the flavor profile of a ShackBurger. At select locations, we also offer local craft beers tailored to each Shack's geography. When it comes to wine, our organic and biodynamic Shack Red^® and Shack White^®, grown and bottled exclusively by Frog's Leap Vineyards in Napa Valley, accentuate our fine dining ethos and provide our guests with premium beverage options not commonly found in our industry. In addition, we serve Abita Root Beer, Shack-made Lemonade, organic fresh brewed iced tea, Fifty/Fifty™ (half lemonade, half organic iced tea), Stumptown cold brew coffee, Honest Kids organic apple juice and Shack\|₂0^® bottled water, from which 1% of the sales supports the clean-up of water sources around the world.
	Dogs Are Welcome Too
	We know that many dog owners treat their four-legged friends as family members. From our first Shack in Madison Square Park, we wanted to include dogs as part of the community gathering experience and developed the "Woof" section on our menu. ShackBurger dog biscuits, peanut butter sauce and vanilla custard make up our signature Pooch-ini^®, which is available at Shacks with an outdoor space. We also serve dog biscuits to-go, handcrafted exclusively for us by a New York-based bakery.

Culinary Innovation

We continuously innovate around our core menu and our team is constantly experimenting with seasonal and local products, to enhance our menu, drive revenue and give our guests more reasons to keep coming back to Shake Shack.

Shack-Wide Limited Time Offerings ("LTO")

We continued our LTO program through fiscal 2017 where we featured a new premium burger or chicken menu item for varying time periods throughout the year. We will continue to supplement our core menu with targeted innovation inspired by the best versions of the classic American roadside burger stands.

▪

BBQ Lineup — In February 2017 we launched a limited-edition lineup of BBQ items nationwide. The BBQ ShackMeister Burger is a 100% all-natural Angus beef cheeseburger topped with crispy ShackMeister Ale-marinated shallots and Shack BBQ sauce; the BBQ Chick’n Shack is a crispy 100% all-natural and antibiotic-free chicken breast with Shack BBQ sauce and pickles; and the BBQ Bacon Cheese Fries are crinkle-cut fries topped with all-natural smoked Niman Ranch bacon, Shack BBQ Sauce and cheese sauce.


▪	Chili Menu — In October 2017 we rolled out a chili-themed menu at Shacks nationwide, which initially debuted exclusively on the Shack App and subsequently was available for in-Shack ordering. The menu featured a Chili Cheeseburger, a Chili Cheese Dog and Chili Cheese Fries, in which each item is topped with a smoked and slow braised beef chili with ancho and chile de arbol peppers.

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▪

Trio of Featured Shakes — In 2017 we replaced the Shake of the Week with a trio of featured shakes, offering our guests a new slate of premium shake offerings for extended periods of time. For approximately three months each, we offered a trio of new featured shakes, which included: Mint Cookies & Cream, Salted Vanilla Toffee and Mud Pie; Chocolate Cookies & Cream, Raspberry Cheesecake and Salted Caramel Pretzel; and Frozen Hot Cocoa, Christmas Cookie and Chocolate Peppermint.

Exclusive Offerings

In addition to supplementing our menu with LTOs, we also seek to create new and exciting offerings that are inspired by local favorites or special events. Some examples of our exclusive offerings from fiscal 2017 include:

▪

The Salty Donut Concrete — To celebrate our newly expanded space in the Miami Beach Shack, in May 2017 we had a limited-edition collaboration with The Salty Donut and an exclusive retail collaboration with LYFE Brand. The Salty Donut concrete features a vanilla frozen custard blended with The Salty Donut's Dulce De Leche donut, banana and salted caramel, all topped with The Salted Donut's Mini Chocolate, Chocolate Donut.

▪

Seasonal Coffee Cake — In May 2017 the Madison Square Park Shack started serving breakfast daily. In addition to our signature breakfast sandwiches and Shack Apple Turnover, the Madison Square Park Shack offers a special seasonal coffee cake by Daily Provisions, a Union Square Hospitality Group eatery. This exclusive breakfast addition is a sour cream coffee cake made with seasonal fruit and topped with oat and cornmeal crumble.

▪

Hot Chick'n — The Hot Chick’n is a crispy chicken breast dusted with a guajillo and cayenne pepper blend and topped with slaw and pickles, which was offered at Shacks nationwide for a limited time in July 2017. The Hot Chick’n joins the award-winning Chick’n Shack, Shake Shack’s first-ever chicken sandwich that debuted in 2015. The Hot Chick'n debuted early exclusively via the Shack App before being rolled out for in-Shack ordering.


▪	Shack Everest — In celebration of Cory Richards and Adrian Ballinger's epic summit of Mount Everest, we whipped up a custom concrete just for them! The Shack Everest concrete is made as a double, with Mast Brothers dark chocolate chunks with vanilla frozen custard, chocolate sprinkles, whipped cream and topped with an “Everest” sugar cone peak.

Chef Collaborations

Our fine dining heritage has enabled Shake Shack to team up with some of the world's best chefs for short-term special menu items. We devote significant resources to menu innovation and are frequently invited to participate and compete in chef events such as the South Beach Wine and Food Festival's Burger Bash, which allows us to test out new creations that can often lead to the introduction of new items. Some of our more notable collaborations in fiscal 2017 include:

▪

Humm Burger and Patty Shack — In March 2017 we participated in a two-part collaboration with Chef Daniel Humm of NoMad at select LA Shacks and the NoMad Truck, in which we featured the Humm Burger and the Patty Shack. The Humm Burger, which was last served at our Decade of Shack celebrations in 2014, is a gruyère cheeseburger topped with applewood smoked bacon, celery relish, Bibb lettuce & truffle mayo, and the Patty Shack is our take on NoMad’s famous chicken burger —a black truffle chicken burger with cave-aged Jasper Hill Farm cheddar and gruyère cheese, onion, leek and ShackSauce.


▪	Golden State Shake — We collaborated with Nicole Rucker of Rucker's Pie in creating the Golden State Shake — a blend of vanilla frozen custard, salted honey butter sauce and finely crushed cornflakes topped with whipped cream, inspired by her famous honey cornflake donut. The Golden State Shake was available at all LA Shacks for the month of May.

▪

SmokeShack Rotolo and Chick'n Parm — We joined forces with Pizzeria Vetri in September 2017 to bring an exclusive menu to select Philly Shacks, all Philadelphia Pizzeria Vetri locations, the Logan Circle Shack and Pizzeria Vetri 14th Street Corridor. Playing on our classic SmokeShack, Pizzeria Vetri served up the SmokeShack Rotolo, a new take on their signature rotolo made with ground beef, all-natural smoked Niman Ranch bacon, Shack cheese sauce and chopped cherry pepper. Simultaneously, we offered the Chick’n Parm, a crispy chicken breast topped with Pizzeria Vetri marinara sauce, fresh mozzarella and basil.

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▪

Den Shack — For one day only, we brought a taste of Tokyo to our Madison Square Park Shack. We teamed up with Michelin-starred Chef Zaiyu Hasegawa to offer the Den Shack, an all-natural 100% Angus beef burger topped with applewood-smoked bacon, DEN miso ShackSauce, sansho pepper and house-pickled cucumbers, which was previously exclusive at the Meiji-Jingu Gaien Shack. In addition to the Den Shack, we also offered a Black Sesame Shake, featuring vanilla frozen custard blended with black sesame puree.

Shake Shack: Recipes & Stories

Guests and fans can now take Shake Shack home with them and try various recipes and inspired menu items in their own kitchen. In May 2017 we launched the Shake Shack cookbook, with 70 recipes, 200 photographs and plenty of stories, fun facts and pro tips for the home cook and Shack fan. The book is organized by menu item — burgers, chicken sandwiches, fries, concretes— and reveals some of our "secrets" for the Shake Shack guest to try at home.

We Are A Warm Community Gathering Place

Design Philosophy

The experience of Shake Shack continues to drive our strategy. Throughout fiscal 2017, and looking forward, we continued to enhance our design capability, simultaneously designing some of our most dynamic Shacks while gaining efficiency in the design process to prepare for the scalability of development ahead. The design of our Shacks is critical to the Shake Shack experience and we blend our core brand identifiers with features specifically designed for each Shack to be of its place and connect directly with its neighborhood. Whether domestic or international, we are passionate about securing vibrant sites and creating unique designs that give each Shack a hand-crafted look, are locally focused, and are appropriate for their respective communities. A typical domestic company-operated Shack is generally between 3,000 and 3,500 square feet with interior seating for between 75 and 100 guests. Additionally, whenever possible, our domestic company-operated Shacks feature either outdoor seating or easy access to a park or green space. We use high-quality tactile materials, warm lighting that focuses on every table and highlights the textured walls and seating layouts that encourage guests to relax and stay for a while. We take great care to build each Shack with thoughtful design, including distinctive architectural features, and compelling eco-friendly touches, such as a solar roof in a few of our free-standing Shacks—all while taking key inspiration from our first home in Madison Square Park. The original Shake Shack in Madison Square Park was designed by SITE Architecture and Design, led by James Wines and Denise Lee, in collaboration with Pentagram, led by Paula Scher. This design set the tone for a dynamic dialogue inside the park and our surrounding neighborhood that continues to drive our designs today. The overall atmosphere of our new Shacks evoke the very best from the original park kiosk, as well as the best of the fine dining experience in terms of the quality of design, materials used, lighting and music. We are mindful that each new Shack should embody the experience of the Madison Square Park Shake Shack—the line, the kiosk style, the experience of ordering food made just for you and the energetic open kitchen.

Each Shack is specifically designed to be of its place and connect with its neighborhood, but we have developed a number of iconic brand identifiers common to every Shack, including wrap-around steel beams, open kitchens, large distinctive menu boards and tables made from reclaimed bowling lanes from New York. Although no two Shacks are alike, we believe that these brand identifiers are key components to the expression of the brand and the experience of Shake Shack.

Often during the construction of new Shacks, particularly those in new markets, we re-imagine the often uninspiring plywood barriers that surround a construction site and use this as a canvas to begin the process of introducing Shake Shack to the community prior to our opening. We also collaborate with local artists and designers to bring beautiful artwork designs and installation to our Shacks from time to time. In 2017 we partnered with Brooklyn-based artist Laolu to reflect the vibrant life of our community with a three-part mural on the walls of the Flatbush Avenue Shack. We also worked with illustrator Leon Johnson who brought his inspiration of the community to life using mixed media, ink, paint and found objects to the walls of our Morningside Heights Shack.

Today, we continue to evolve our timeless designs through the engagement of different designers from around the country. We continue to develop our prototypes, “classic” Shack designs, free-standing, in-line and unique, one-of-a-kind formats. We are constantly pushing to be more creative and nimble, allowing us to ramp up our growth while making the Shack experience even more dynamic and accessible, as well as adapting to smaller footprints, proving our versatility and ability to enter and flourish in a variety of spaces. We currently use our second generation prototype model: a 3,200 square foot free-standing Shack that fits well in suburban locations, designed with more efficient use of materials while still offering the same full guest experience. Additionally, we further innovated our Shack design in the digital space by introducing a whole new guest flow with the opening of our first kiosk-

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only ordering and cashless environment at Astor Place in October 2017. We designed an optimized kitchen, with a self-service beverage station, bringing it out of the kitchen, as well as a split-kitchen format that allows for greater output during peak times.

We also announced in fiscal 2017 that our home office headquarters will move to the West Village of New York City. Our new home office will feature expanded space for our home office employees, a Shack on the ground floor, a test kitchen facility on the lower level where our culinary team can continue to dream up new menu items, and a multi-purpose room to host special events and training. We engaged the team at Michael Hsu Office of Architecture in designing the new home office, who we have also worked with in bringing us designs at our Shacks, for example, in West Hollywood and South Lamar. Our new home office is an important investment in our team, our continued growth and our ability to innovate even more.

Beloved Lifestyle Brand

Since 2004, we have become a globally recognized brand with outsized consumer awareness relative to our current footprint of 159 Shacks, opening our first international Shack after only seven domestic Shacks. Shake Shack has become a New York City institution, a vibrant and authentic community gathering place that delivers an unparalleled experience to our loyal guests and a broad, global demographic. Shake Shack grew up alongside the emergence of social media and has benefited from an ongoing love affair with passionate fans who share their real-time experiences with friends. We aim to establish genuine connections with our guests and the communities in which they live. Shake Shack continues to be recognized in global media with impressions garnering attention well beyond our size.

Shake Shack was born as the modern version of the old roadside burger stand during the birth of social media and the digital age. The premium positioning and brand voice, derived from the spirit, integrity and humor of Shake Shack, are reinforced by our contemporary, responsible designs and hospitable team members who Stand For Something Good; this identity anchors our marketing efforts. We believe that our guests appreciate the experience of coming to Shake Shack as a community gathering place and, thus, the heart of our marketing strategy is to communicate and connect with our guests both at our Shacks and through social media.

Digital and Social Media

Much like we design our Shacks to be community gathering places, we execute a social media strategy that creates an online, on-brand community gathering place. Our guests and fans easily connect with us through Facebook, Instagram, Twitter, Tumblr, Pinterest and Snapchat. We recognize the impact of social media on today's consumers and we use these platforms to share information with our guests about new menu items, new Shack openings and other relevant Shake Shack information. As of December 27, 2017, globally, we had approximately 815,000 Facebook fans, 561,000 Instagram followers and 101,000 Twitter followers. We communicate with our fans in creative and organic ways that both strengthen our connection with them and increase brand awareness. We use Facebook live-streaming to post videos including interviews with our culinary partners, Shack leaders and sneak peeks into our new Shacks. In June 2016, we ranked #4 on Restaurant Social Media Index's top 250 restaurant brands, which is measured on influence, sentiment and engagement.

The launch of our Shack App provides a new way to experience Shake Shack and promote our signature menu items as well as our creative promotions. In addition to our social media presence, the Shack App is another digital tool that allows us to further expand our brand awareness and increase connectivity with our guests. Guests have the opportunity to take advantage of certain promotions and vouchers featured on the Shack App. After we launched the Shack App nationwide in January 2017, we ran a company-wide promotion offering a free single ShackBurger to each guest who downloads the new Shack App. On our shakeshack.com website we have a mobile-friendly interactive digital tool featuring allergen and nutritional data, dedicated Shack App page and a Shack city guide section with local geo-mapping. Additionally, in August 2017 we launched our Shake Shack chatbot , which was introduced through Facebook Messenger and Twitter DM, to answer guests’ most frequently asked questions.

Community and Charitable Partners

Each Shack focuses on conveying a consistent national brand message while also tailoring marketing efforts to each Shack. We always have menu items that feature local ingredients and beers that are specific to each Shack's community. We also aim marketing efforts at local events which help position Shake Shack as a premium brand that is connected to its neighborhood through participating in local celebrations and developing relationships within the community. Outside of local events, each Shack has a local charity partner to which it donates 5% of the sales from its Pie Oh My concrete. Beginning in August 2017, the D.C. Shacks, for instance, featured the "Livin' the Pie Life" and donates 5% of this Pie Oh My concrete's sales to Casey's Trees.

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In addition to each Shack's local charity partner, Shacks will also participate or host other local charitable events. Some examples include:

▪

Shake-speare Shake — The Upper West Side Shack paid tribute to Free Shakespeare in the Park with a limited-edition shake benefiting The Public Theater. The Shack served the Shake-speare Shake, a strawberry and rose shake topped with whipped cream and fairy dust sprinkles. 100% of the proceeds from the shake benefited The Public Theater’s wide range of programming, including its Free Shakespeare in the Park series, the bedrock of The Public Theater’s dedication to making theater accessible to all. The exclusive Shake-speare offering coincided with The Public Theater’s showing of the beloved comedy A Midsummer's Night Dream.

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Shake Shack x Bombas Community Initiative — In April 2017, we launched the Shake Shack x Bombas Community Initiative, where team members from Shake Shack and Bombas volunteer each month by donating burgers and socks to a shelter or program in their hometown of NYC. To celebrate the partnership, Bombas brought back its limited-edition Shake Shack x Bombas socks. The premium socks feature Bombas’ innovative sock-tech with their honeycomb arch support system and seamless toes for superior comfort and bold design and were offered at the Shack Shop, select Shake Shack locations and bombas.com for one day.

▪

Wellness in the Schools Mushroom Burger— At our Upper West Side Shack, we partnered with New York Chef Bill Telepan to create the Wellness in the Schools Mushroom Burger, available for one day only in April 2017. The Wellness in the Schools Mushroom Burger is a flat-top griddled mushroom burger topped with swiss cheese, pickled maitake aioli and crispy shallots. 100% of proceeds from the limited-edition burger went to Wellness in the Schools, a non-profit that inspires healthy eating and fitness for kids in public schools.

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Annual British Shake Sale — We held our 4th Annual British Shake Sale in August 2017 in support of Action Against Hunger. We teamed up with renowned pastry chef Dominique Ansel – named World’s Best Pastry Chef 2017 – and Dominique Ansel Bakery London to introduce a new limited-edition shake for the occasion, The Banoffee. The Banoffee features fresh, hand-spun vanilla custard blended with caramelized bananas, Dulce de Leche, Speculoos biscuits and a hint of sea salt, topped with Chantilly cream and Speculoos crumbles. Anyone who visited a Shack and donated £2 or more to Action Against Hunger in August, received a voucher for a complimentary hand-spun shake on their next visit. The 4th Great British Shake Sale followed the record breaking success of our Great American Shake Sale in the U.S. which was held in May 2017.

Shack Track & Field

With our commitment to community and balance, Shake Shack offers Shack Track & Field, a free community fitness club offered on a monthly basis, open to the public of all ages and abilities. Shack Track & Field partners with local running stores and offers a variety of activities, including group runs, bike rides and yoga classes. The program is entirely free and includes a complimentary drink at the Shack after each event. Shack Track & Field currently has 10 chapters in cities across the country and continues to grow.

Burgers 'n' Brews

Shacks across the country host guided beer pairing dinners in partnership with local craft breweries. These ticketed events consist of three rounds of expertly paired Shack classics, specials and frozen custard beer floats. Guests walk out with custom swag items, full bellies and a deeper understanding of our brand. In 2018, we hosted eleven of these hyperlocal events.

Shack-wide Events

Shake Shack promotes annual events and limited-time offers to drive repeat visits and build intrigue among staff and guests.

Since 2012, Shake Shack has held The Great American Shake Sale™ during the month of May to raise money and awareness for childhood hunger. During The Great American Shake Sale, we encourage guests to donate $2 in exchange for a free shake (a $5 value) at their next visit. 100% of these donations go directly to Share Our Strength's No Kid Hungry campaign. In May 2017, we raised $633,000 across our domestic company-operated Shacks for this initiative.

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Pop-ups and Promotions

Throughout fiscal 2017 we continued to do innovative branding by collaborating with other chefs and creating various pop-up concepts as well as offering exciting promotions to drive brand awareness. These pop-ups are a key part of building the growing strength of the Shake Shack brand while capturing these unique moments that differentiate our brand. Some notable collaborative pop-ups and promotions include:

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Momofuku Pop-Up – For one day only in January 2017, we hosted a pop-up in Toronto at Momofuku Daisho, the first-ever taste of Shake Shack in Canada. We served up ShackBurgers and crinkle cut fries while Momofuku selected beverages from Steam Whistle Brewery and Norman Hardie Winery and Vineyard to pair with guests' burgers and fries. Additionally, $1 from every order was donated to SickKids Foundation contributing to child health research, learning and care.

▪

St. Louis Porano Pasta Pop-Up – In anticipation of our first Shack opening in St. Louis, we held a pop-up with Porano Pasta of Niche Food Group. We partnered with Chef Matthew Rice of Niche Food Group and created butterscotch frozen custard banana-oat cookie sandwich just for the occasion. Additionally, we partnered with local illustrator, Adam Koon, to create a whimsical piece showcasing beloved historical landmarks around the city. Guests in attendance received a free limited-edition tote bag featuring the illustration as a token of our appreciation.

▪

EMP Summer House – For one weekend in August, we served lunch on the patio of EMP Summer House in East Hampton, offering up classics like the ShackBurger, Bacon Double Cheeseburger and crinkle cut fries along with Hamptons-inspired specialty items like the CLAMBurger and Lobster Shack. We also offered up this exclusive menu at the Madison Square Park Shack during the same weekend, serving up the Lobster Shack.

Product Placement

Shake Shack has been fortunate to receive considerable product placement in movies, TV shows and other media without any cost to the Company. In fact, Shake Shack has been able to charge fees for these location shoots, which have included scenes from the motion pictures Something Borrowed and Tower Heist, as well as the acclaimed HBO series The Newsroom , Showtime's Billions and Shameless, Amazon original series Bosch (which featured our West Hollywood Shack) and a mention in CBS' sitcom The Big Bang Theory. We have also been featured in segments on The Daily Show, Saturday Night Live, CBS Sunday Morning and Late Night with Jimmy Fallon.

We Are Accountable For Results

Our brand power and thoughtful approach to growth have resulted in strong performance across a variety of geographic areas and formats. We grew from 40 Shacks in fiscal 2013 to 159 Shacks in fiscal 2017 spanning 20 states, the District of Columbia and 11 countries, representing a 41% compound annual growth rate ("CAGR"). As a result of our expansion and strong performance:


▪	Our total revenue grew from $82.5 million in fiscal 2013 to $358.8 million in fiscal 2017, a 44% CAGR. Compared to fiscal 2016, total revenue increased 33.6% in fiscal 2017.


▪	Net loss attributable to Shake Shack Inc. for fiscal 2017 was $0.3 million, compared to income of $12.4 million for fiscal 2016.

▪

Adjusted pro forma net income, a non-GAAP measure, increased 25.4% to $21.0 million, or $0.57 per fully exchanged and diluted share in fiscal 2017, compared to $16.8 million, or $0.46 per fully exchanged and diluted share in fiscal 2016. For a reconciliation of adjusted pro forma, a non-GAAP measure, to net income (loss) attributable to Shake Shack Inc., see "Non-GAAP Financial Measures—Adjusted Pro Forma Net Income and Adjusted Pro Forma Earnings Per Fully Exchanged and Diluted Share" in Part II, Item 7.


•	Adjusted EBITDA, a non-GAAP measure, increased 29% to $64.7 million for fiscal 2017 from $50.2 million for fiscal 2016. For a reconciliation of Adjusted EBITDA to net income, see "Non-GAAP Financial Measures—EBITDA and Adjusted EBITDA" in Part II, Item 7.

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(1)

System-wide sales consists of sales from our domestic company-operated Shacks, our 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. Our total revenue also includes certain up-front fees such as territory fees and opening fees we receive in connection with our licensing arrangements.

COMPETITION

The restaurant industry is highly competitive and fragmented, with restaurants competing on factors such as taste, price, food quality, service, location and the ambiance and condition of the restaurant. Our primary competitors include "better burger" concept restaurants, as well as other fast casual restaurants, and, to a lesser extent, quick service and casual dining restaurants. Our competition includes multi-unit national and regional chains, as well as a wide variety of locally-owned restaurants. Our competitors may operate company-owned restaurants, franchised restaurants or some combination. Many of our competitors offer breakfast, lunch and dinner, as well as dine-in, carry-out and delivery services. We may also compete with companies outside of the traditional restaurant industry, such as grocery store chains, meal subscription services and delicatessens, especially those that target customers who seek high-quality food, as well as convenience food stores, cafeterias and other dining outlets. Our competition continues to intensify as new competitors enter both the burger and fast casual segments. We also face increasing competitive pressures from some of our competitors who have recently announced initiatives to offer better quality ingredients, such as antibiotic-free meat. For more information regarding the risks we face from our competitors, who may have, among other things, a more diverse menu, greater financial resources, lower operating costs, a more well-established brand, better locations and more effective

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marketing than we do, see "Risks Related to Operating in the Restaurant Industry—We face significant competition for guests, and if we are unable to compete effectively, our business could be adversely affected" in Item 1A, Risk Factors.

We specifically target guests that seek an engaging and differentiated guest experience that includes great food, unique and thoughtful integration with local communities and high standards of excellence and hospitality. We believe that we are well positioned to continue to grow our market position, as we believe consumers will continue to trade up to higher quality offerings given the increasing consumer focus on responsible sourcing, ingredients and preparation. Additionally, we believe that consumers will continue to move away from the added time commitment and cost of traditional casual dining. We believe that many consumers want to associate with brands whose ethos matches their own, and that Shake Shack, with our mission to Stand For Something Good and our culture of Enlightened Hospitality, is a distinct and differentiated global lifestyle brand.

GROWTH STRATEGIES

We believe that we are well-positioned to achieve significant, sustainable financial growth. Our goal — to be a growing and loyal brand, connected to our community, relentlessly focused on excellence, experience and hospitality. We plan to continue to expand our business, drive Shack sales and enhance our competitive positioning by executing on the following strategies:

Opening New Domestic Company-Operated Shacks

This is where our greatest opportunity for growth lies. Shake Shack’s business model remains strong and we intend to open many more Shacks. We waited nearly five years to open our second Shack, and we are still in the very nascent stage of our story, with only 90 domestic company-operated and 10 domestic licensed Shacks in 20 states and Washington, D.C. as of December 27, 2017. We believe there is tremendous whitespace opportunity to expand in both existing and new U.S. markets, and we will continue to invest in the infrastructure that will enable us to continue to grow rapidly and with discipline. In fiscal 2017, we significantly expanded our domestic company-operated footprint by opening 26 new Shacks representing a 40.6% increase in our domestic company-operated Shack count. We plan to open between 32 and 35 new domestic company-operated Shacks each year for the foreseeable future. We believe that over the long-term we have the potential to grow our current domestic company-operated Shack footprint to at least 450 Shacks by opening domestic company-operated Shacks in new and existing markets. The rate of future Shack growth in any particular period is inherently uncertain and is subject to numerous factors that are outside of our control. As a result, we do not currently have an anticipated timeframe for such expansion. We believe we have a versatile real estate model built for growth. We have adopted a disciplined expansion strategy designed to leverage the strength of our business model and our significant brand awareness to successfully develop new Shacks in an array of markets that are primed for growth, including new and existing, as well as small and large markets. We continue to be encouraged by the success of our multi-format strategy which includes Shacks in various formats including but not limited to urban centers, free-standing pads, mall locations, lifestyle centers, train stations, airports, stadiums, outlets and more.

We will continue to expand in existing markets (California, metro New York, Mid-Atlantic, Texas and more) in order to leverage operational effectiveness as we cluster in these high-density markets, but we will also enter new markets, such as Birmingham, Charlotte, Denver, Kansas City, Nashville, San Francisco and Seattle. With 159 Shacks around the world (as of December 27, 2017), we have identified many attractive and differentiated markets for the Shake Shack experience. In major metropolitan areas, we seek locations where communities gather, often with characteristics such as high foot traffic, substantial commercial density, reputable co-tenants and other traffic drivers such as proximity to parks, museums, schools, hospitals and tourist attractions. For every potential domestic company-operated Shack we consider, we apply rigorous financial metrics to ensure we maintain our targeted profitability.

Capitalizing on Our Outsized Brand Awareness

One of the great advantages for Shake Shack has been our birthplace and headquarters in New York City. Rarely has a brand of our type been born in New York, and from a fine dining company. This gives us a tremendous media and brand power which often outweighs our relative size. We focus our efforts on building a genuine connection with our guests and integrating into their communities through investment in innovative marketing and programming. We utilize various social media outlets to actively engage with our growing online following. We were named one of the 2017 Golden Chain Award winners by Nation's Restaurant News, as

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well as one of Thrillist's "14 Restaurant Chains that Changed America." The Chick'n Shack received top honor at the 2017 MenuMasters Awards for outstanding menu research and development. In June 2016, we ranked #4 on Restaurant Social Media Index's top 250 restaurant brands, which is measured on influence, sentiment and engagement. Furthermore, we believe that our press and media impressions and industry recognition are a testament to the strength of our brand. We were listed number one on the New York Post's list of "America's 20 Best Chain Restaurants" in 2016, named as one of the "Best Burgers in the U.S."and one of the "50 best Things to Eat in NYC before you Die" in 2016 by MSN Food & Drink, "Best Burger" at the 2014 South Beach Wine and Food Festival's Burger Bash and more. Additionally, we give back to the communities in which we operate, and strengthen awareness for philanthropic causes such as Share Our Strength's No Kid Hungry campaign. We had the honor of being recognized at Compassion in World Farming’s 2017 Good Farm Animal Welfare Awards (GFAWA), which celebrates companies that use or have committed to use cage-free eggs or egg products. Our marketing efforts focus on interacting with our guests in an authentic, innovative manner which creates memorable, meaningful experiences. The experience that we provide for our guests and local communities has generated a growing loyal following that promotes our brand through word-of-mouth. We believe that this outsized brand awareness will continue to fuel our growth in existing and new markets.

Growing Same-Shack Sales

Given the significant awareness of our brand and the excitement we have been able to generate for our market launches, our Shacks in newer markets have generally opened with higher volumes and operating profits relative to their second year, following the strong initial honeymoon period. We expect our Shacks to deliver low single digit same-Shack sales growth in the longer term, while the number of new Shack openings relative to our comparable Shack base remains our primary driver of growth in the near term. We believe, based on our business strategy and various factors in and out of our control, that we will have quarters where our same Shack sales may be negative. We do, however, continually focus on improving our same-Shack sales performance by providing an engaging and differentiated guest experience that includes new seasonal and Shack-specific offerings, technological upgrades including the Shack App, unique and thoughtful integration with local communities and high standards of excellence and hospitality. We will continue to innovate around our core menu to keep our offerings fresh, while remaining focused on our signature items.

Thoughtfully Increasing Our Licensed Shacks

We will continue to grow our licensed portfolio by expanding further domestically, in the countries in which we currently have internationally licensed operations, as well as entering new international markets. This strategy historically has been a low-cost, high-return method of growing our brand awareness and providing an increasing source of cash flow. In December 2014, we entered into an exclusive licensing arrangement with a leading retail and food operator for the development of up to 10 new Shacks in Japan over the following five years. As of December 27, 2017 we have opened six Shacks in Tokyo—at the renowned Meiji-Jingu Park, Ebisu, the Tokyo International Forum, Shinjuku, Yokohama and Roppongi. In December 2015, we announced plans to enter South Korea with a new licensed partner for the development of 25 Shacks over the following 10 years, and as of December 27, 2017 we have opened five Shacks in Seoul, South Korea, in the Gangnam district, the Cheongdam neighborhood, Doota, AK Plaza and Starfield Goyang. In the summer of 2017, we announced our plans to bring Shake Shack to Hong Kong and Macau with a total of 14 Shacks to open through 2027, as well our plans to open 25 Shacks in greater Shanghai through 2028. We believe there are additional international markets that will embrace the Shake Shack concept. Domestically, we have continued to grow our licensed business at airport locations around the country, opening in LAX Terminal 3, as well as in sports arenas, opening in Minute Maid Park in Houston and M&T Bank Stadium in Baltimore. Given our position in New York and the success of our current licensed Shacks at home and abroad, we continue to attract substantial interest from potential international licensees around the world and we believe we have significant opportunities to expand our licensing footprint in existing and new international markets as our team, development opportunities and supply chain matures.

See Note 19 to the consolidated financial statements included in Part II, Item 8 for financial information about geographic areas.

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OPERATIONS

Sourcing and Supply Chain

Shake Shack has always been committed to working with best-in-class suppliers, across our supply chain. Our Stand For Something Good vision guides us in how we source and develop our ingredients, always looking for the best ways to provide top quality food at an excellent value and accessible to all. We pride ourselves on sourcing premium ingredients from like-minded producers—all-natural proteins, vegetarian fed, humanely raised and source verified, with no hormones or antibiotics. We're also proud to share our animal welfare policy which can be found on our Shake Shack website.

We have a regional strategy for ground beef production to ensure that we are always serving freshly ground and never frozen beef at our domestic Shacks. Initially, and around the time or our IPO, our beef production was focused in New York City. However, as we've grown around the country, we now have six butchers spread throughout the country who produce our burgers on a daily basis, and we will continue to partner with regional suppliers in new markets as we grow.

We have a limited number of suppliers for our major ingredients, including beef patties, chicken, potato buns, custard, Portobello mushrooms and cheese sauce. In fiscal 2017, we purchased all of our (i) ground beef patties from seven suppliers, with approximately 65% of our ground beef patties supplied by one supplier, (ii) chicken breast from one supplier, (iii) potato buns directly from one supplier, (iv) custard base from three suppliers, (v) 'Shroom Burgers from two suppliers, with approximately 95% of our 'Shroom Burgers supplied by one supplier and (vi) ShackSauce from one supplier. We have developed a reliable supply chain and continue to focus on identifying alternative sources to avoid any possible interruptions of service and product.

Distribution

We contract with one distributor, which we refer to as our "broadline" distributor, to provide virtually all of our food distribution services in the United States. As of December 27, 2017, approximately 84% of our core food and beverage ingredients and 100% of our paper goods and chemicals, collectively representing approximately 49% of our purchases, were processed through our broadline distributor for distribution and delivery to each Shack. As of December 27, 2017, we were utilizing 14 affiliated distribution centers to supply our domestic company-operated Shacks. We recognize that the safety and consistency of our products begins with our suppliers. Suppliers must meet certain criteria and strict quality control standards in the production and delivery of our food and other products. We regularly evaluate our broadline distributor to ensure that the products we purchase conform to our standards and that the prices they offer are competitive.

Food Safety and Quality Assurance

Food safety is a top priority and we are committed to serving safe, high quality food. We have rigorous quality assurance and food safety protocols in place throughout our supply chain. We have a comprehensive supplier and ingredient selection process and maintain a limited list of approved suppliers. We thoroughly review the results of suppliers' internal and external quality audits, insurance coverage and track record on an ongoing basis. We have a food safety site inspection process and periodically perform supplier site visits, as well as mock food recalls. We have developed and implemented training and operating standards related to the food preparation, cleanliness and safety in the Shacks. We have a dedicated Quality Assurance team to ensure food safety across all domestic company-operated Shacks as well as employing an external third-party to conduct additional audits of these Shacks at different times of the year.

Site Selection

Shake Shack is ultimately about the guest experience and our site selection focuses on choosing great sites where people want to be together. Our site selection process is actively led by our Real Estate Committee, which meets regularly and follows a detailed approval process to ensure quality, fiduciary responsibility and overall adherence to our strategic growth goals. We invest in analytical tools for extensive demographic analysis and data collection for both existing and new potential sites. In addition to our in-house team of experienced real estate professionals, we use a national real estate broker to manage a network of regional brokers in order to leverage external resources in pursuit of pipeline development and consistent deal flow.

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Construction

A typical Shack takes between 14 and 20 weeks to build. In fiscal 2017 the cost to build a new Shack ranged from approximately $1.1 million to $3.3 million, with an average near-term build cost of approximately $1.7 million, excluding pre-opening costs. The total investment cost of a new Shack in fiscal 2017, which includes costs related to items such as furniture, fixtures and equipment, ranged from approximately $1.6 million to $3.7 million, with an average investment cost of approximately $2.2 million. We use a number of general contractors on a regional basis and employ a mixed approach of bidding and strategic negotiation in order to ensure the best value and highest quality construction.

Management Information Systems

Our domestic company-operated Shacks use computerized point-of-sale and back-office systems created by NCR Corporation, which we believe are scalable to support our growth plans. These point-of-sale systems are designed specifically for the restaurant industry and we use many customized features to increase operational effectiveness, internal communication and data analysis. This system provides a touch screen interface, graphical order confirmation display, touch screen kitchen display and integrated, high-speed credit card and gift card processing. The point-of-sale system is used to collect daily transaction data, which generates information about daily sales, product mix and average transaction size.

In January 2017 we rolled out nationwide our first-ever mobile ordering Shack App for iOS where guests are able to order Shack menu items directly from their phone. We followed this with our launch of the Shack App for Android in July 2017. The Shack App was created in collaboration with several key external partners, aiding in the mobile production, mobile ordering platform, guest engagement platform and digital experience testing services during its development. Information from the Shack App indirectly interfaces with our point-of-sale system.

In October 2017 we opened our first Shack, at Astor Place, where we feature a kiosk-only order, cashless environment. The Shack kiosk was developed to allow Shake Shack to serve more guests at peak times – whether in-Shack, for pickup via the Shack App, or even delivery. The Shack kiosk replicates the experience of the Shack App with a sharp aesthetic, an intuitive touch screen interface and ease of ordering. Guests simply select their food, place an order and choose to receive an alert via text when their order is ready.

Our back-office computer systems are designed to assist in the management of our domestic company-operated Shacks and provide real-time labor and food cost management tools. These tools provide the home office and operations management quick access to detailed business data and reduces the amount of time spent by our Shack-level managers on administrative needs.

INTELLECTUAL PROPERTY

Since our inception, we have undertaken to strategically and proactively develop our intellectual property portfolio by registering our trademarks and service marks worldwide. As of December 27, 2017, we had 20 registered marks domestically, including registrations in our core marks ("Shake Shack," "Shack Burger," "

" and "

") and certain other marks, such as Stand for Something Good. Internationally, we have registered our core marks in over 82 countries spanning six continents. These marks are registered in multiple international trademark classes, including for restaurant services, food services, non-alcoholic beverages and apparel. We also own the domain www.shakeshack.com as well as over 350 other domain names for use in other markets.

In addition, we have agreements with the suppliers of our proprietary products stating that the recipes and production processes associated with those products are our property, confidential to us, and may not be provided to any other customer. Our proprietary products include the burger recipe for our whole muscle blend and the patty grinding procedure and the product formulations for our ShackSauce, 'Shroom Burger, chicken breast, chicken breader and buttermilk herb mayo, cheese sauce, unflavored custard base, chocolate custard base, and certain toppings and custard mix-ins. We also have exclusive arrangements with our suppliers of ShackMeister Ale, Shack Red wine, Shack White wine, all-natural hot dog and all-natural chicken sausage, relish and cherry peppers.

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GOVERNMENT REGULATION AND ENVIRONMENTAL MATTERS

We are subject to extensive federal, state, local and foreign laws and regulations, as well as other statutory and regulatory requirements, including those related to, among others, nutritional content labeling and disclosure requirements, food safety regulations, local licensure, building and zoning regulations, employment regulations and laws and regulations related to our licensed operations. New laws and regulations or new interpretations of existing laws and regulations may also impact our business. The costs of compliance with these laws and regulations are high and are likely to increase in the future and any failure on our part to comply with these laws may subject us to significant liabilities and other penalties. See "Regulatory and Legal Risks" in Item 1A, Risk Factors for more information.

We are not aware of any federal, state or local provisions that have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, that have materially affected, or are reasonably expected to materially affect, our results of operations, competitive position, or capital expenditures.

SEASONALITY

Our business is subject to slight seasonal fluctuations during the summer months, affecting our second and third quarters in a fiscal year. Additionally, given our use of a fiscal calendar, there may be some fluctuations between quarters due to holiday shifts in the calendar year.

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EMPLOYEES

As of December 27, 2017, we had 4,440 employees, of whom 3,738 were hourly team members, 564 were Shack-level managers and 138 were home office personnel.

EXECUTIVE OFFICERS OF THE REGISTRANT

The name, age and position held by each of our executive officers as of December 27, 2017 is set forth below.



Name	Age	Position
Randy Garutti	42	Chief Executive Officer and Director
Tara Comonte	43	Chief Financial Officer
Zachary Koff	38	Chief Operating Officer

Randy Garutti has served as Shake Shack's Chief Executive Officer and on the Board of Directors since April 2012. Prior to becoming Chief Executive Officer, Mr. Garutti served as Chief Operating Officer of SSE Holdings since January 2010. Mr. Garutti has worked with USHG and Mr. Meyer for over 18 years. Prior to leading Shake Shack, Mr. Garutti was the Director of Operations, overseeing the operations for all USHG restaurants. In addition, Mr. Garutti served as General Manager of Union Square Cafe and Tabla, both of which won numerous accolades in the hospitality industry. Mr. Garutti graduated from Cornell University's School of Hotel Administration in 1997. Mr. Garutti was selected to our board of directors because of his leadership role in our development and growth and because he possesses particular knowledge and experience in strategic planning and leadership in the hospitality business.

Tara Comonte has served as Shake Shack's Chief Financial Officer since June 2017. Prior to joining Shake Shack, Ms. Comonte served as Chief Financial & Business Affairs Officer and Executive Vice President at Getty Images, having joined in April 2013 as Chief Financial Officer and Senior Vice President. Earlier in her career, Ms. Comonte served as Chief Financial Officer at McCann Worldgroup, part of Interpublic Group (IPG). Previously, she was a key founding member of Mediabrands, IPG's media group, serving there as Global Chief Financial Officer and Chief Operating Officer.

Zachary Koff has served as Shake Shack’s Chief Operating Officer since January 2017. Prior to becoming Chief Operating Officer, Mr. Koff served as the Senior Vice President of Operations since March 2015, Vice President of Operations since April of 2012 and Director of Operations since February 2010, as well as opened Shake Shack’s 4th location in Miami Beach. Prior to leading operations for Shake Shack, Mr. Koff worked for the Bravo/Brio Restaurant Group for eight years, and opened and operated locations in five markets. Mr. Koff graduated from Cornell University’s School of Hotel Administration in 2002 with a Bachelor’s Degree in Hospitality Administration and a concentration in Law.

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AVAILABLE INFORMATION

Our website is located at www.shakeshack.com, and our investor relations website is located at http://investor.shakeshack.com. We are subject to the informational requirements of the Securities Exchange Act of 1934 (the "Exchange Act") and file or furnish reports, proxy statements and other information with the U.S. Securities and Exchange Commission ("SEC"). Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements, statements of changes in beneficial ownership and amendments to those reports are available for free on our investor relations website as soon as reasonably practicable after we electronically file them with, or furnish them to, the SEC. The public may read and copy any materials filed by us with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington, DC 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.

We webcast our earnings calls and certain events we participate in or host with members of the investment community on our investor relations website. Additionally, we provide notifications of news or announcements regarding our financial performance, including SEC filings, investor events, press and earnings releases as part of our investor relations website. Investors and others can receive notifications of new information posted on our investor relations website in real time by subscribing to email alerts. We also make certain corporate governance documents available on our investor relations website, including our corporate governance guidelines, board committee charters, codes of conduct and ethics, as well as certain company policies.

The contents of our websites are not incorporated by reference into this Annual Report on Form 10-K or in any other report or document we file with the SEC, and any references to our websites are intended to be inactive textual references only.

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Item 1A. Risk Factors.

Described below are certain risks that we believe apply to our business and the industry in which we operate. You should carefully consider each of the following risk factors in conjunction with other information provided in this Annual Report on Form 10-K and in our other public disclosures. The risks described below highlight potential events, trends or other circumstances that could adversely affect our business, financial condition, results of operations, cash flows, liquidity or access to sources of financing, and consequently, the market value of our Class A common stock. These risks could cause our future results to differ materially from historical results and from guidance we may provide regarding our expectations of future financial performance. The risks described below are those that we have identified as material and is not an exhaustive list of all the risks we face. There may be others that we have not identified or that we have deemed to be immaterial. All forward-looking statements made by us or on our behalf are qualified by the risks described below.

RISKS RELATED TO OUR GROWTH STRATEGIES AND OPERATIONS

Our long-term success is dependent on the selection, design and execution of appropriate business strategies.

We operate in a highly competitive and ever-changing environment. Our long-term success is dependent on our ability to identify, develop and execute appropriate business strategies within this environment. Our current strategies include:


▪	opening new domestic company-operated Shacks;


▪	capitalizing on our outsized brand awareness;


▪	innovating our digital products and capabilities;


▪	growing same-Shack sales; and


▪	thoughtfully increasing our licensed Shacks, both domestically and abroad.

We may experience challenges in achieving the goals we have set and we may be unsuccessful in executing on our strategies once identified. Conversely, we may also execute on poorly designed strategies that prove to be ineffective or require us to make substantial changes to our strategy in order to produce the desired results. Our strategies may expose us to additional risks, and strategies that have been successful for us in the past may fail to be so in the future. We may incur significant costs and damage our brand if we are unable to identify, develop and execute on appropriate business strategies, which could have a material adverse impact on our business and results of operations.

Our primary growth strategy is highly dependent on the availability of suitable locations and our ability to develop and open new Shacks on a timely basis and on terms attractive to us.

One of the key means of achieving our growth strategies will be through opening and operating new Shacks on a profitable basis for the foreseeable future. We must identify target markets where we can enter or expand, taking into account numerous factors such as the location of our current Shacks, the target consumer base, population density, demographics, traffic patterns, competition, geography and information gathered from our various contacts. We may not be able to open our planned new Shacks within budget or on a timely basis, if at all, given the uncertainty of these factors, which could adversely affect our business, financial condition and results of operations. As we operate more Shacks, our rate of expansion relative to the size of our Shack base will eventually decline.

The number and timing of new Shacks opened during any given period may be negatively impacted by a number of factors including:


▪	the identification and availability of attractive sites for new Shacks;


▪	difficulty negotiating suitable lease terms;


▪	shortages of construction labor or materials;


▪	recruitment and training of qualified personnel in the local market;


▪	our ability to obtain all required governmental permits, including zonal approvals;


▪	our ability to control construction and development costs of new Shacks;


▪	competition in new markets, including competition for appropriate sites;

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▪	failure of the landlords to timely deliver real estate to us and other landlord delays;


▪	the proximity of potential sites to an existing Shack, and the impact of cannibalization on future growth;


▪	anticipated commercial, residential and infrastructure development near our new Shacks; and


▪	the cost and availability of capital to fund construction costs and pre-opening costs.

Accordingly, we cannot assure you that we will be able to successfully expand as we may not correctly analyze the suitability of a location or anticipate all of the challenges imposed by expanding our operations. Our growth strategy, and the substantial investment associated with the development of each new domestic company-operated Shack, may cause our operating results to fluctuate and be unpredictable or adversely affect our profits. In addition, as has happened when other restaurant concepts have tried to expand, we may find that our concept has limited appeal in new markets or we may experience a decline in the popularity of our concept in the markets in which we operate. If we are unable to expand in existing markets or penetrate new markets, our ability to increase our revenues and profitability may be materially harmed or we may face losses.

Our expansion into new domestic markets may present increased risks, which could affect our profitability.

We plan to open domestic company-operated Shacks in markets where we have little or no operating experience. Shacks we open in new markets may take longer to reach expected Shack sales and profit levels on a consistent basis, are likely to be less profitable on average than our current base of Shacks and may have higher construction, occupancy or operating costs than Shacks we open in existing markets. New markets may have competitive conditions, consumer tastes and discretionary spending patterns that are more difficult to predict or satisfy than our existing markets. We may need to make greater investments than we originally planned in advertising and promotional activity in new markets to build brand awareness. We may find it more difficult in new markets to hire, motivate and keep qualified employees who share our values. We may also incur higher costs from entering new markets if, for example, we assign area directors to manage comparatively fewer Shacks than we assign in more developed markets. Also, until we attain a critical mass in a market, the Shacks we do open will incur higher food distribution costs and reduced operating leverage. As a result, these new Shacks may be less successful or may achieve target Shack-level operating profit margins at a slower rate, if ever. If we do not successfully execute our plans to enter new markets, our business, financial condition or results of operations could be adversely affected. In addition, we plan to continue to expand into new international markets, which can pose similar and additional challenges in opening new Shacks.

Our failure to manage our growth effectively could harm our business and operating results.

Our growth plan includes opening a significant number of new Shacks. Our existing personnel, management systems, financial and management controls and information systems may not be adequate to support our planned expansion. Our ability to manage our growth effectively will require us to continue to enhance these systems, procedures and controls and to locate, hire, train and retain management and operating personnel, particularly in new markets. We may not be able to respond on a timely basis to all of the changing demands that our planned expansion will impose on management and on our existing infrastructure, or be able to hire or retain the necessary management and operating personnel, which could harm our business, financial condition or results of operations. These demands could cause us to operate our existing business less effectively, which in turn could cause a deterioration in the financial performance of our existing Shacks. If we experience a decline in financial performance, we may decrease the number of or discontinue Shack openings, or we may decide to close Shacks that we are unable to operate in a profitable manner.

New Shacks, once opened, may not be profitable, and may negatively affect Shack sales at our existing Shacks.

Our results have been, and in the future may continue to be, significantly impacted by the timing of new Shack openings (often dictated by factors outside of our control), including landlord delays, associated Shack pre-opening costs and operating inefficiencies, as well as changes in our geographic concentration due to the opening of new Shacks. We typically incur the most significant portion of pre-opening costs associated with a given Shack within the three months preceding the opening of the Shack. Our experience has been that labor and operating costs associated with a newly opened Shack for the first several months of operation are materially greater than what can be expected after that time, both in aggregate dollars and as a percentage of Shack sales. Our new Shacks commonly take 8 to 12 weeks to reach target operating levels due to inefficiencies typically associated with new Shacks, including the training of new personnel, new market learning curves, inability to hire sufficient qualified staff and other factors. We may incur additional costs in new markets, particularly for transportation and distribution, which may impact the profitability of those Shacks. Although we have specific target operating and financial metrics, new Shacks may not meet these targets or may take longer than

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anticipated to do so. Any new Shacks we open may not be profitable or achieve operating results similar to those of our existing Shacks, which could adversely affect our business, financial condition or results of operations.

The opening of a new Shack in or near markets in which we already have Shacks could adversely affect the Shack sales of those existing Shacks. Existing Shacks could also make it more difficult to build our consumer base for a new Shack in the same market. We will continue to cluster in select markets and open new Shacks in and around areas of existing Shacks that are operating at or near capacity to leverage operational efficiencies and effectively serve our guests. Cannibalization of Shack sales among our Shacks may become significant in the future as we continue to expand our operations and could adversely affect our Shack sales growth, which could, in turn, adversely affect our business, financial condition or results of operations.

Additionally, many of our current domestic company-operated Shacks are located in high volume urban markets. As we expand, this percentage will decline and as a result we do not expect to maintain our current average unit volumes ("AUVs") and Shack-level operating profit margins, and our business, financial condition and results of operations may be adversely affected.

If we are unable to maintain and grow Shack sales at our existing Shacks, our financial performance could be adversely affected.

The level of same-Shack sales growth, which represents the change in year-over-year revenues for domestic company-operated Shacks open for 24 full months or longer, could affect our Shack sales growth. Our ability to increase same-Shack sales depends, in part, on our ability to successfully implement our initiatives to build Shack sales. It is possible such initiatives will not be successful, that we will not achieve our target same-Shack sales growth or that same-Shack sales growth could be negative, which may cause a decrease in Shack sales and profit growth that would adversely affect our business, financial condition or results of operations.

Our mission to Stand For Something Good subjects us to risks.

Our mission to Stand For Something Good is a significant part of our business strategy and who we are as a company. It's our commitment to all that is good in the world and a reflection of how we embrace our values both internally and externally. We pride ourselves on sourcing premium ingredients from like-minded producers—all natural proteins, vegetarian fed, humanely raised and source verified, with no hormones or antibiotics. We are dedicated to using sustainable materials and equipment whenever possible, such as handmade tabletops constructed from reclaimed bowling alleys, as well as being committed to achieving ethical and humane practices for the animals in our supply chain. We also strive to be the best employer and a good citizen in each community we call home.

We do, however, face many challenges in carrying out our mission to Stand For Something Good. We incur higher costs and other risks associated with paying above-average wages to our employees and purchasing high quality ingredients grown or raised with an emphasis on quality, sustainability and other responsible practices. As a result, our food and labor costs may be significantly higher than other companies who do not source high quality ingredients or pay above minimum wage. Additionally, the supply for high quality ingredients may be limited and it may take us longer to identify and secure relationships with suppliers that are able to meet our quality standards and have sufficient quantities to support our growing business. If we are unable to obtain a sufficient and consistent supply for our ingredients on a cost-effective basis, our food costs could increase or we may experience supply interruptions which could have an adverse effect on our operating margins. Additionally, some of our competitors have recently announced initiatives to offer better quality ingredients, such as antibiotic-free meat. If this trend continues, it could further limit our supply for certain ingredients and we may lose our competitive advantage as it will be more difficult to differentiate ourselves.

Because we hold ourselves to such high standards, and because we believe our guests have come to have high expectations of us, we may be more severely affected by negative reports or publicity if we fail, or are believed to have failed, to comply with our own standards. The damage to our reputation may be greater than other companies that do not have similar values as us, and it may take us longer to recover from such an incident and gain back the trust of our guests. Our mission to Stand For Something Good also exposes us to criticism from special interest groups who have different opinions regarding certain food issues or who believe we should pursue different strategies and goals. Any adverse publicity that results from such criticism could damage our brand and adversely affect customer traffic.

We believe that our Stand For Something Good philosophy has been a major contributing factor in our past success because we believe consumers are increasingly more focused on where their food comes from and how it's made, and that consumers want to

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associate themselves with brands whose ethos matches that of their own. However, if these trends change we may no longer be able to successfully compete with other restaurants who share different values than us.

If we fail to maintain our corporate culture, our relationships with our employees and guests could be negatively affected.

We take great pride in our culture and believe that it is the single most important factor in our success. We believe that our culture of Enlightened Hospitality and our mission to Stand For Something Good creates a truly differentiated experience for our guests and is one of the reasons guests choose to dine with us and employees choose us as a place of employment. If we are unable to maintain our culture, especially as we continue to rapidly grow and expand in new markets, our reputation may be damaged, we may lose the trust of our guests, employee morale may be diminished and we may experience difficulty recruiting and retaining qualified employees. Any of these factors could have a material adverse effect on our business, financial condition and results of operations.

We have a limited number of suppliers for our major products and rely on one distribution company for the majority of our domestic distribution needs. If our suppliers or distributor are unable to fulfill their obligations under our arrangements with them, we could encounter supply shortages and incur higher costs.

We have a limited number of suppliers for our major ingredients, including beef patties, chicken, potato buns, custard, portobello mushrooms and cheese sauce. In fiscal 2017, we purchased all of our (i) ground beef patties from seven suppliers, with approximately 65% of our ground beef patties supplied by one supplier; (ii) chicken breast from one supplier; (iii) potato buns directly from one supplier, which operates two facilities; (iv) custard base from three suppliers; (v) 'Shroom Burgers from two suppliers, with approximately 95% of our 'Shroom Burgers supplied by one supplier; and (vi) ShackSauce from one supplier. Due to this concentration of suppliers, the cancellation of our supply arrangements with any one of these suppliers or the disruption, delay or inability of these suppliers to deliver these major products to our Shacks may materially and adversely affect our results of operations while we establish alternate distribution channels. In addition, if our suppliers fail to comply with food safety or other laws and regulations, or face allegations of non-compliance, their operations may be disrupted. We cannot assure you that we would be able to find replacement suppliers on commercially reasonable terms or a timely basis, if at all.

We contract with one distributor, which we refer to as our "broadline" distributor, to provide virtually all of our food distribution services in the United States. As of December 27, 2017, approximately 84% of our core food and beverage ingredients and 100% of our paper goods and chemicals, collectively representing 49% of our purchases, were processed through our broadline distributor for distribution and delivery to each Shack. As of December 27, 2017, we were utilizing 14 affiliated distribution centers and each distribution center carries two to three weeks of inventory for our core ingredients. In the event of a catastrophe, such as a fire, our broadline distributor can supply the Shacks affected by their respective distribution center from another affiliated distribution center. If a catastrophe, such as a fire, were to occur at the distribution center that services the Shacks located in New York and New Jersey, we would be at immediate risk of product shortages because that distribution center supplies 30% of our domestic company-operated Shacks as of December 27, 2017, which collectively represented 43% of our Shack sales for fiscal 2017. The other 13 distribution centers collectively supply the other approximately 70% of our domestic company-operated Shacks, which represented the remaining 57% of our Shack sales.

Accordingly, although we believe that alternative supply and distribution sources are available, there can be no assurance that we will continue to be able to identify or negotiate with such sources on terms that are commercially reasonable to us. If our suppliers or distributors are unable to fulfill their obligations under their contracts or we are unable to identify alternative sources, we could encounter supply shortages and incur higher costs, each of which could have a material adverse effect on our results of operations.

Our plans to open new Shacks, and the ongoing need for capital expenditures at our existing Shacks, require us to spend capital.

Our growth strategy depends on opening new Shacks, which will require us to use cash flows from operations and a portion of the net proceeds from our initial public offering. We cannot assure that cash flows from operations and the net proceeds from our initial public offering will be sufficient to allow us to implement our growth strategy. If these funds are not allocated efficiently among our various projects, or if any of these initiatives prove to be unsuccessful, we may experience reduced profitability and we could be required to delay, significantly curtail or eliminate planned Shack openings, which could have a material adverse effect on our business, financial condition and results of operations.

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In addition, as our Shacks mature, our business will require capital expenditures for the maintenance, renovation and improvement of existing Shacks to remain competitive and maintain the value of our brand standard. This creates an ongoing need for cash, and, to the extent we cannot fund capital expenditures from cash flows from operations, funds will need to be borrowed or otherwise obtained.

If the costs of funding new Shacks or renovations or enhancements to existing Shacks exceed budgeted amounts, and/or the time for building or renovation is longer than anticipated, our profits could be reduced. Additionally, recent inflation of material and labor costs have resulted in higher construction costs. If we cannot access the capital we need, we may not be able to execute our growth strategy, take advantage of future opportunities or respond to competitive pressures.

Our marketing strategies and channels will evolve and our programs may or may not be successful.

Shake Shack is a small, but growing brand. We incur costs and expend other resources in our marketing efforts to attract and retain guests. Our strategy includes public relations, digital and social media, promotions and in-store messaging, which require less marketing spend as compared to traditional marketing programs. Currently, the amount of discounted promotions and advertising we do is not significant. As the number of Shacks increases, and as we expand into new markets, we expect to increase our investment in advertising and consider additional promotional activities. Accordingly, in the future, we will incur greater marketing expenditures, resulting in greater financial risk and a greater impact on our Company.

We rely heavily on social media for many of our marketing efforts. If consumer sentiment towards social media changes or a new medium of communication becomes more mainstream, we may be required to fundamentally change our current marketing strategies which could require us to incur significantly more costs.

Some of our marketing initiatives may not be successful, resulting in expenses incurred without the benefit of higher revenues. Additionally, some of our competitors have greater financial resources, which enable them to spend significantly more on marketing and advertising than we are able to at this time. Should our competitors increase spending on marketing and advertising or our marketing funds decrease for any reason, or should our advertising and promotions be less effective than those of our competitors, there could be a material adverse effect on our business, financial condition and results of operations.

We rely on a limited number of licensees for the operation of our licensed Shacks, and we have limited control with respect to the operations of our licensed Shacks, which could have a negative impact on our reputation and business.

We rely, in part, on our licensees and the manner in which they operate their Shacks to develop and promote our business. As of December 27, 2017, three licensees operated all of our domestic licensed Shacks and three licensees operated all of our international licensed Shacks, with one such licensee operating 81% of our international licensed Shacks. Our licensees are required to operate their Shacks according to the specific guidelines we set forth, which are essential to maintaining brand integrity and reputation, all laws and regulations applicable to Shake Shack and its subsidiaries, and all laws and regulations applicable in the countries in which Shake Shack operates. We provide training to these licensees to integrate them into our operating strategy and culture. However, since we do not have day-to-day control over all of these Shacks, we cannot give assurance that there will not be differences in product and service quality, operations, labor law enforcement or marketing or that there will be adherence to all of our guidelines and applicable laws at these Shacks. In addition, if our licensees fail to make investments necessary to maintain or improve their Shacks, guest preference for the Shake Shack brand could suffer. Failure of these Shacks to operate effectively could adversely affect our cash flows from those operations or have a negative impact on our reputation or our business.

Given the relatively small number of licensees with which we do business, the success of our licensed operations depends on our ability to establish and maintain good relationships with our licensees, in particular, our relationship with our largest licensee who has an exclusive right to open new Shacks in existing markets. The value of our brand and the rapport that we maintain with our licensees are important factors for potential licensees considering doing business with us. If we are unable to maintain good relationships with licensees, we may be unable to renew license agreements and opportunities for developing new relationships with additional licensees may be adversely affected. This, in turn, could have an adverse effect on our business, financial condition and results of operations.

Although we have developed criteria to evaluate and screen prospective developers and licensees, we cannot be certain that the developers and licensees we select will have the business acumen necessary to open and operate successful licensed Shacks in

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their licensing areas. Our licensees compete for guests with other restaurants in their geographic markets, and the ability of our licensees to compete for guests directly impacts our business, financial condition and results of operations, as well as the desirability of our brand to prospective licensees. Licensees may not have access to the financial or management resources that they need to open the Shacks contemplated by their agreements with us or to be able to find suitable sites on which to develop them, or they may elect to cease development for other reasons. Licensees may not be able to negotiate acceptable lease or purchase terms for the sites, obtain the necessary permits and governmental approvals or meet construction schedules. Additionally, financing from banks and other financial institutions may not always be available to licensees to construct and open new Shacks. Any of these problems could slow our growth from licensing operations and reduce our licensing revenues.

RISKS RELATED TO OPERATING IN THE RESTAURANT INDUSTRY

Incidents involving food safety and food-borne illnesses could adversely affect guests' perception of our brand, result in lower sales and increase operating costs.

Food safety is a top priority, and we dedicate substantial resources to ensure the safety and quality of the food we serve. Nevertheless, we face food safety risks, including the risk of food-borne illness and food contamination, which are common both in the restaurant industry and the food supply chain and cannot be completely eliminated. We rely on third-party food suppliers and distributors to properly handle, store and transport our ingredients to our Shacks. Any failure by our suppliers, or their suppliers, could cause our ingredients to be contaminated, which may be difficult to detect before the food is served. Additionally, the risk of food-borne illness may also increase whenever our food is served outside of our control, such as by third-party delivery services. We are further exposed to this risk if our sales through unaffiliated third-party delivery services increases, if we continue to conduct pilots with third-party delivery partners or if we enter into a formal arrangement with one or more third-party delivery partners.

Regardless of the source or cause, any report of food-borne illnesses or food safety issues, whether or not accurate, at one or more of our Shacks, including Shacks operated by our licensees, could adversely affect our brand and reputation, which in turn could result in reduced guest traffic and lower sales. Additionally, we believe that, because our mission to Stand For Something Good promotes the use of higher quality ingredients, our guests have high expectations of us and we could be more severely affected by incidents of food-borne illnesses or food safety issues than some of our competitors who do not promote such standards. We may also have a more difficult time recovering from a food-borne illness incident and may be required to incur significant costs to repair our reputation.

If any of our guests become ill from food-borne illnesses, we could be forced to temporarily close one or more Shacks. Furthermore, any instances of food contamination, whether or not at our Shacks, could subject us or our suppliers to voluntary or involuntary food recalls and the costs to conduct such recalls could be significant and could interrupt our supply to unaffected Shacks or increase the cost of our ingredients.

Additionally, consumer preferences could be affected by health concerns about the consumption of beef, our key ingredient. For example, if a pathogen, such as "mad cow disease," or other virus, bacteria, parasite or toxin infects the food supply (or is believed to have infected the food supply), regardless of whether our supply chain is affected, guests may actively avoid consuming certain ingredients. A negative report or negative publicity surrounding such an incident, whether related to one of our Shacks or to a competitor in the industry, may have an adverse impact on demand for our food and could result in a material decrease in guest traffic and lower sales.

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Rising labor costs and difficulties recruiting and retaining the right team members could adversely affect our business.

We believe that our culture is the single most important factor to our success. Therefore, our success depends, in part, on our ability to attract, motivate and retain a sufficient number of qualified managers and team members to meet the needs of our existing Shacks and to staff new Shacks. We aim to hire people who have integrity, who are warm, friendly, motivated, caring, self-aware and intellectually curious—what we call "51%'ers." 51%'ers are excited and committed to championship performance, remarkable and enriching hospitality, embodying our culture, and actively growing themselves and the brand. In many markets, competition for qualified individuals is intense and we may be unable to identify and attract a sufficient number of individuals to meet our growing needs, especially in markets where our brand is less established. As a result, because we aim to hire the best people, we may be required to pay higher wages and provide greater benefits. Our commitment to taking care of our team may cause us to incur higher labor costs compared to other restaurant companies. Additionally, several states in which we operate have enacted minimum wage increases and it is possible that other states or the federal government could also enact minimum wage increases. Such increases will cause an increase to our labor and related expenses and cause our Shack-level operating profit margins to decline. As more minimum wage increases or other legislation relating to employee benefits are enacted or changed, such as the Affordable Care Act, we may be required to implement additional pay increases or offer additional benefits in the future in order to continue to attract and retain the most qualified people, which may put further pressure on our operating margins by increasing costs. Overall, we expect wages at all levels to continue to increase in the near and short term and we expect these rising wages to add pressure to our operating profit.

We place a heavy emphasis on the qualification and training of our team members and spend a significant amount of time and money training our employees. Any inability to recruit and retain qualified individuals may result in higher turnover and increased labor costs, and could compromise the quality of our service, all of which could adversely affect our business. Any such inability could also delay the planned openings of new Shacks and could adversely impact our existing Shacks. Such increased costs of attracting qualified employees or delays in Shack openings could adversely affect our business and results of operations.

Increased food commodity and energy costs could decrease our Shack-level operating profit margins or cause us to limit or otherwise modify our menu, which could adversely affect our business.

Our profitability depends, in part, on our ability to anticipate and react to changes in the price and availability of food commodities, including among other things beef, poultry, grains, dairy and produce. Prices may be affected due to market changes, increased competition, the general risk of inflation, shortages or interruptions in supply due to weather, disease or other conditions beyond our control, or other reasons. For example, in 2015 an avian flu outbreak decimated the laying hen population in certain regions of the United States, which significantly increased the price of eggs, a significant ingredient in our custard base. Other events could increase commodity prices or cause shortages that could affect the cost and quality of the items we buy or require us to further raise prices or limit our menu options. These events, combined with other more general economic and demographic conditions, could impact our pricing and negatively affect our Shack sales and Shack-level operating profit margins. While we have been able to partially offset inflation and other changes in the costs of core operating resources by gradually increasing menu prices, coupled with more efficient purchasing practices, productivity improvements and greater economies of scale, there can be no assurance that we will be able to continue to do so in the future. From time to time, competitive conditions could limit our menu pricing flexibility. In addition, macroeconomic conditions could make additional menu price increases imprudent. There can be no assurance that future cost increases can be offset by increased menu prices or that increased menu prices will be fully absorbed by our guests without any resulting change to their visit frequencies or purchasing patterns. In addition, there can be no assurance that we will generate same-Shack sales growth in an amount sufficient to offset inflationary or other cost pressures.

We may decide to enter into certain forward pricing arrangements with our suppliers, which could result in fixed or formula-based pricing with respect to certain food products. However, these arrangements generally are relatively short in duration and may provide only limited protection from price changes. In addition, the use of these arrangements may limit our ability to benefit from favorable price movements.

Our profitability is also adversely affected by increases in the price of utilities, such as natural gas, electric and water, whether as a result of inflation, shortages or interruptions in supply, or otherwise. Our ability to respond to increased costs by increasing prices or by implementing alternative processes or products will depend on our ability to anticipate and react to such increases and other more general economic and demographic conditions, as well as the responses of our competitors and guests. All of these things may be difficult to predict and beyond our control. In this manner, increased costs could adversely affect our results of operations.

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Shortages or interruptions in the supply or delivery of food products could adversely affect our operating results.

We are dependent on frequent deliveries of food products that meet our exact specifications. Shortages or interruptions in the supply of food products caused by problems in production or distribution, inclement weather, unanticipated demand or other conditions could adversely affect the availability, quality and cost of ingredients, which would adversely affect our operating results.

Our burgers depend on the availability of our proprietary ground beef blend. Availability of our blend depends on two different components: raw material supplied by the slaughterhouses and ground and formed beef patties supplied by regional grinders who further process and convert whole muscle purchased from the slaughterhouses. The primary risk we face is with our regional grinders. If there is an interruption of operation at any one of our regional grinder's facilities, we face an immediate risk because each Shack typically has less than three days of beef patty inventory on hand. However, we have agreements with our regional grinders to provide an alternate back-up supply in the event of a disruption in their operations. In addition, our largest supplier of raw material has agreed to an emergency plan to supply us in the event of a disruption of operations at one of our beef grinders through our broadline distributor's distribution network, but it would not be able to do so immediately.

We currently have three approved raw beef suppliers and six approved beef processors in the United States. If there is a supply issue with all U.S. raw beef, we have 10 approved raw beef suppliers and seven approved beef processors in other countries. The risks to using international suppliers are shipping lead time, shipping costs, potential import duties and U.S. customs. It is unknown at this time how long it would take and at what cost the raw material would be to import from any such other country, but the delay and cost would likely be adverse to our business.

We face significant competition for guests, and if we are unable to compete effectively, our business could be adversely affected.

The restaurant industry is intensely competitive with many well-established companies that compete directly and indirectly with us with respect to taste, price, food quality, service, value, design and location. We compete in the restaurant industry with multi-unit national, regional and locally-owned and/or operated limited-service restaurants and full-service restaurants. We compete with (i) "better burger" restaurants, (ii) fast casual restaurants, (iii) quick service restaurants and (iv) casual dining restaurants. Our competitors may operate company-owned restaurants, franchised restaurants or some combination. Many of our competitors offer breakfast, lunch and dinner, as well as dine-in, carry-out and delivery services. We may also compete with companies outside of the traditional restaurant industry, such as grocery store chains, meal subscription services and delicatessens, especially those that target customers who seek high-quality food, as well as convenience food stores, cafeterias and other dining outlets. Many of our competitors have existed longer than we have and may have a more established market presence, better locations and greater name recognition nationally or in some of the local markets in which we operate or plan to open Shacks. Some of our competitors may also have significantly greater financial, marketing, personnel and other resources than we do. They may also operate more restaurants than we do and be able to take advantage of greater economies of scale than we can given our current size.

Our competition continues to intensify as new competitors enter the burger, fast casual, quick service and casual dining segments. Many of our competitors emphasize low cost "value meal" menu options or other programs that provide price discounts on their menu offerings, a strategy we do not pursue. We also face increasing competitive pressures from some of our competitors who have recently announced initiatives to offer better quality ingredients, such as antibiotic-free meat.

Additionally, changes in consumer tastes, nutritional and dietary trends, traffic patterns and the type, number, and location of competing restaurants often affect the restaurant business. Our sales could be impacted by changes in consumer preferences in response to dietary concerns, including preferences regarding items such as calories, sodium, carbohydrates or fat. Our competitors may react more efficiently and effectively to these changes than we can. We cannot make any assurances regarding our ability to effectively respond to changes in consumer health perceptions or our ability to adapt our menu offerings to trends in eating habits.

Our continued success depends, in part, on the continued popularity of our menu and the experience we offer guests at our Shacks. If we are unable to continue to compete effectively on any of the factors mentioned above, our traffic, Shack sales and Shack-level operating profit margins could decline and our business, financial condition and results of operations would be adversely affected.

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Form 10-K | 27

Our international licensed Shacks import many of our proprietary and other core ingredients from the United States, the United Kingdom and the European Union. If this international supply chain is interrupted, our international licensed operations could encounter supply shortages and incur higher costs.

Our international licensed Shacks import many of our proprietary ingredients from the United States, United Kingdom and the European Union ("EU"). For example, our proprietary blend of beef patties and/or raw materials for beef patties originate from the United States and the EU as well as Australia. In addition, outside of Korea and Turkey our potato buns supplied internationally are exclusively from the United States, and other key items such as crinkle cut fries and American cheese originate within the United States or the EU. While we have established secondary supply solutions for some of these ingredients, we have not acquired secondary supplies for all of them.

Due to the long lead time and general volatility in the supply chain, the third-party logistic providers for our international licensed Shacks in the Middle East carry one to three months of inventory to allow for delays or interruptions in the supply chain. Specifically, we have had past and ongoing issues ensuring that timely and adequate supplies reach our Middle East Shacks. In the Middle East, our licensee delegates the supply function to its own third-party logistics providers in each country in which it operates, with which we have limited and restricted communication, preventing us from exercising control or instruction over such entities.

Sanctions enacted by the Russian Federation on many imported ingredients from the United States, the United Kingdom, the EU and Australia have affected our Russian licensee's ability to import such ingredients to our Russian Shacks. As a result of the changing and uncertain nature of such sanctions, and although our Russian licensee has identified a back-up supplier, we are unable to guarantee that the licensee will be able to import our proprietary ingredients to supply these Shacks. We have given our licensee in Russia approval to utilize alternative ingredients not affected by the sanctions, but there is a risk that these substitute ingredients may be inferior in taste and quality or come from suppliers that have not been vetted for food safety and quality assurance.

Our U.K. Shack faces challenges in obtaining potato buns, which originate from our U.S. suppliers. While these ingredients have no trade restrictions, they must be shipped from the United States, which poses an ongoing risk of delay in supply deliveries.

If our international licensed Shacks are unable to obtain our proprietary ingredients in the necessary amounts in a timely fashion as a result of logistics issues, sanctions or other challenges, it could harm its business and adversely affect the licensing revenue we receive, adversely impacting our business and results of operations.

We are subject to risks associated with leasing property subject to long-term non-cancelable leases.

We do not own any real property and all of our domestic company-operated Shacks are located on leased premises. The leases for our Shacks generally have initial terms ranging from 10 to 15 years and typically provide for two five-year renewal options as well as for rent escalations. However, the license agreement for our Madison Square Park Shack can be terminated by the New York City Commissioner of Parks for any reason on 25 days' written notice.

Generally, our leases are net leases that require us to pay our share of the costs of real estate taxes, utilities, building operating expenses, insurance and other charges in addition to rent. We generally cannot cancel these leases. Additional sites that we lease are likely to be subject to similar long-term non-cancelable leases. If we close a Shack, we may still be obligated to perform our monetary obligations under the applicable lease, including, among other things, payment of the base rent for the remaining lease term. In addition, as each of our leases expire, we may fail to negotiate renewals, either on commercially acceptable terms or at all, which could cause us to close Shacks in desirable locations. We depend on cash flows from operations to pay our lease expenses and to fulfill our other cash needs. If our business does not generate sufficient cash flow from operating activities, and sufficient funds are not otherwise available to us from borrowings or other sources, we may not be able to service our lease obligations or fund our other liquidity and capital needs, which would materially affect our business.

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Restaurant companies have been the target of class action lawsuits and other proceedings that are costly, divert management attention and, if successful, could result in our payment of substantial damages or settlement costs.

Our business is subject to the risk of litigation by employees, guests, suppliers, licensees, stockholders or others through private actions, class actions, administrative proceedings, regulatory actions or other litigation. The outcome of litigation, particularly class action and regulatory actions, is difficult to assess or quantify. In recent years, restaurant companies have been subject to lawsuits, including class action lawsuits, alleging violations of federal and state laws regarding workplace and employment matters, discrimination and similar matters. A number of these lawsuits have resulted in the payment of substantial damages by the defendants. Similar lawsuits have been instituted from time to time alleging violations of various federal and state wage and hour laws regarding, among other things, employee meal deductions, overtime eligibility of assistant managers and failure to pay for all hours worked. In fiscal 2015 we were the subject of such an employment-related claim and there can be no assurance that we will not be named in any such lawsuit in the future or that we would not be required to pay substantial expenses and/or damages.

Occasionally, our guests file complaints or lawsuits against us alleging that we are responsible for some illness or injury they suffered at or after a visit to one of our Shacks, including actions seeking damages resulting from food-borne illness or accidents in our Shacks. We are also subject to a variety of other claims from third parties arising in the ordinary course of our business, including contract claims. The restaurant industry has also been subject to a growing number of claims that the menus and actions of restaurant chains have led to the obesity of certain of their customers.

Regardless of whether any claims against us are valid or whether we are liable, claims may be expensive to defend and may divert time and money away from our operations. In addition, they may generate negative publicity, which could reduce guest traffic and Shack sales. Although we maintain what we believe to be adequate levels of insurance to cover any of these liabilities, insurance may not be available at all or in sufficient amounts with respect to these or other matters. A judgment or other liability in excess of our insurance coverage for any claims or any adverse publicity resulting from claims could adversely affect our business and results of operations.

Our business is subject to risks related to our sale of alcoholic beverages.

We serve beer and wine at most of our Shacks. Alcoholic beverage control regulations generally require our Shacks to apply to a state authority and, in certain locations, county or municipal authorities for a license that must be renewed annually and may be revoked or suspended for cause at any time. Alcoholic beverage control regulations relate to numerous aspects of daily operations of our Shacks, including minimum age of patrons and employees, hours of operation, advertising, trade practices, wholesale purchasing, other relationships with alcohol manufacturers, wholesalers and distributors, inventory control and handling, storage and dispensing of alcoholic beverages. Any future failure to comply with these regulations and obtain or retain licenses could adversely affect our business, financial condition and results of operations.

We are also subject in certain states to "dram shop" statutes, which generally provide a person injured by an intoxicated person the right to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated person. We carry liquor liability coverage as part of our existing comprehensive general liability insurance. Recent litigation against restaurant chains has resulted in significant judgments and settlements under dram shop statutes. Because these cases often seek punitive damages, which may not be covered by insurance, such litigation could have an adverse impact on our business, results of operations or financial condition. Regardless of whether any claims against us are valid or whether we are liable, claims may be expensive to defend and may divert time and resources away from operations and hurt our financial performance. A judgment significantly in excess of our insurance coverage or not covered by insurance could have a material adverse effect on our business, results of operations or financial condition.

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GENERAL BUSINESS AND ECONOMIC RISKS

Damage to our reputation could negatively impact our business, financial condition and results of operations.

Our reputation and the quality of our brand are critical to our business and success in existing markets, and will be critical to our success as we enter new markets. We believe that we have built our reputation on the high quality of our food and service, our commitment to our guests, our strong employee culture, and the atmosphere and design of our Shacks, and we must protect and grow the value of our brand in order for us to continue to be successful. Any incident that erodes consumer loyalty for our brand could significantly reduce its value and damage our business.

We may be adversely affected by any negative publicity, regardless of its accuracy, including with respect to:


▪	food safety concerns, including food tampering or contamination;


▪	food-borne illness incidents;


▪	the safety of the food commodities we use, particularly beef;


▪	guest injury;


▪	security breaches of confidential guest or employee information;


▪	third-party service providers, particularly related to delivery services and information technology, and potential guest dissatisfaction from circumstances out of our control relating to third-party service providers;


▪	employment-related claims relating to alleged employment discrimination, wage and hour violations, labor standards or health care and benefit issues; or


▪	government or industry findings concerning our Shacks, restaurants operated by other food service providers or others across the food industry supply chain.

Also, there has been a marked increase in the use of social media platforms and similar devices, including weblogs (blogs), social media websites and other forms of internet-based communications that provide individuals with access to a broad audience of consumers and other interested persons. The availability of information on social media platforms is virtually immediate as is its impact. Many social media platforms immediately publish the content their subscribers and participants can post, often without filters or checks on accuracy of the content posted. The opportunity for dissemination of information, including inaccurate information, is seemingly limitless and readily available. Information concerning us may be posted on such platforms at any time. Information posted may be adverse to our interests or may be inaccurate, each of which may harm our performance, prospects or business. The harm may be immediate without affording us an opportunity for redress or correction.

Ultimately, the risks associated with any such negative publicity or incorrect information cannot be completely eliminated or mitigated and may materially harm our reputation, business, financial condition and results of operations.

Changes in economic conditions, both domestically and internationally, could materially affect our business, financial condition and results of operations.

The restaurant industry depends on consumer discretionary spending. During the economic downturn that began in 2008, disruptions in the overall economy, including the impact of the housing crisis, high unemployment and financial market volatility and unpredictability, caused a related reduction in consumer confidence, which negatively affected the restaurant industry. These factors, as well as national, regional and local regulatory and economic conditions, gasoline prices, energy and other utility costs, inclement weather, conditions in the residential real estate and mortgage markets, health care costs, access to credit, disposable consumer income and consumer confidence, affect discretionary consumer spending. Additionally, because some of our Shacks are located in or near retail malls, general declines in mall traffic experienced by the retail industry in general could negatively affect us.

In poor economic conditions, guest traffic could be adversely impacted if our guests choose to dine out less frequently or reduce the amount they spend on meals while dining out. Reduced guest traffic could result in lower Shack sales and licensing revenue, as well as a decline in our profitability as we spread fixed costs across a lower level of Shack sales. Prolonged negative trends in sales could cause us and our licensees to, among other things, reduce the number and frequency of new Shack openings, close Shacks or delay remodeling of our existing Shacks or recognize asset impairment charges.

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Because many of our domestic company-operated Shacks are concentrated in local or regional areas, we are susceptible to economic and other trends and developments, including adverse weather conditions, in these areas.

Our financial performance is highly dependent on Shacks located in the Northeast and the New York City metropolitan area, which comprised approximately 38% (or 34 out of 90) of our total domestic company-operated Shacks as of December 27, 2017. As a result, adverse economic conditions in any of these areas could have a material adverse effect on our overall results of operations. In addition, given our geographic concentrations, negative publicity regarding any of our Shacks in these areas could have a material adverse effect on our business and operations, as could other regional occurrences such as local strikes, terrorist attacks, increases in energy prices, inclement weather or natural or man-made disasters.

In particular, adverse weather conditions, such as regional winter storms, floods, severe thunderstorms and hurricanes, could negatively impact our results of operations. Temporary or prolonged Shack closures may occur and guest traffic may decline due to the actual or perceived effects of future weather related events.

Security breaches of confidential guest information in connection with our electronic processing of credit and debit card transactions, or mobile ordering app, or confidential employee information may adversely affect our business.

Like many other retail companies and because of the prominence of our brand, we have experienced, and will likely continue to experience, attempts to compromise our information technology systems. Additionally, the techniques and sophistication used to conduct cyber-attacks and breaches of information technology systems, as well as the sources and targets of these attacks, change frequently and are often not recognized until such attacks are launched or have been in place for a period of time. While we continue to make significant investment in physical and technological security measures, employee training, and third party services, designed to anticipate cyber-attacks and prevent breaches, our information technology networks and infrastructure or those of our third party vendors and other service providers could be vulnerable to damage, disruptions, shutdowns, or breaches of confidential information due to criminal conduct, employee error or malfeasance, utility failures, natural disasters or other catastrophic events. Due to these scenarios we cannot provide assurance that we will be successful in preventing such breaches or data loss.

Additionally, the information, security and privacy requirements imposed by governmental regulation are increasingly demanding. Our systems may not be able to satisfy these changing requirements and guest and employee expectations, or may require significant additional investments or time in order to do so. Efforts to hack or breach security measures, failures of systems or software to operate as designed or intended, viruses, operator error or inadvertent releases of data all threaten our and our service providers' information systems and records. A breach in the security of our information technology systems or those of our service providers could lead to an interruption in the operation of our systems, resulting in operational inefficiencies and a loss of profits. Additionally, a significant theft, loss or misappropriation of, or access to, guests' or other proprietary data or other breach of our information technology systems could result in fines, legal claims or proceedings, including regulatory investigations and actions, or liability for failure to comply with privacy and information security laws, which could disrupt our operations, damage our reputation and expose us to claims from guests and employees, any of which could have a material adverse effect on our financial condition and results of operations.

If we are unable to maintain and update our information technology systems to meet the needs of our business, our business could be adversely impacted.

We rely heavily on information systems, including point-of-sale processing in our Shacks, for management of our supply chain, accounting, payment of obligations, collection of cash, credit and debit card transactions, mobile ordering and other processes and procedures. As a rapidly growing business, our current information technology infrastructure may not be adequately suited to handle the increasing volume of data and additional information needs of our organization. If we are unable to successfully upgrade our information systems to meet the growing needs of our business, our growth could be adversely affected.

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Additionally, as technology systems continue to evolve and as consumers adopt new technologies, we may need to enhance our systems or modify our strategies in order to remain relevant in our industry and to our guests. If we are unable to successfully identify and implement new and emerging technologies, our business could be adversely affected.

If we experience a material failure or interruption in our systems, our business could be adversely impacted.

Our ability to efficiently and effectively manage our business depends significantly on the reliability and capacity of our information technology systems. Our operations depend upon our ability to protect our computer equipment and systems against damage from physical theft, fire, power loss, telecommunications failure or other catastrophic events, as well as from internal and external security breaches, viruses and other disruptive problems. The failure of these systems to operate effectively, maintenance problems, upgrading or transitioning to new platforms, expanding our systems as we grow or a breach in security of these systems could result in interruptions to or delays in our business and guest service and reduce efficiency in our operations. If our information technology systems fail and our redundant systems or disaster recovery plans are not adequate to address such failures, or if our business interruption insurance does not sufficiently compensate us for any losses that we may incur, our revenues and profits could be reduced and the reputation of our brand and our business could be materially adversely affected. In addition, remediation of such problems could result in significant, unplanned capital investments.

Additionally, as we continue to evolve our digital platforms and enhance our internal systems, we place increasing reliance on third-parties to provide infrastructure and other support services. We may be adversely affected if any of our third-party service providers experience any interruptions in their systems, which then could potentially impact the services we receive from them and cause a material failure or interruption in our own systems.

Because a component of our strategy is to continue to grow our licensed business internationally, the risks of doing business internationally could lower our revenues, increase our costs, reduce our profits or disrupt our business.

Fifty-nine of our 69 licensed Shacks as of December 27, 2017 are located outside the United States and we expect to continue to expand our licensed Shacks internationally. As a result, we are and will be, on an increasing basis, subject to the risks of doing business outside the United States, including:


▪	changes in foreign currency exchange rates or currency restructurings and hyperinflation or deflation in the countries in which we operate;


▪	the imposition of restrictions on currency conversion or the transfer of funds or limitations on our ability to repatriate non-U.S. earnings in a tax effective manner;


▪	the presence and acceptance of varying levels of business corruption in international markets;


▪	the ability to comply with, or impact of complying with, complex and changing laws, regulations and policies of foreign governments that may affect investments or operations, including foreign ownership restrictions, import and export controls, tariffs, embargoes, intellectual property, licensing requirements and regulations, increase in taxes paid and other changes in applicable tax laws;


▪	the difficulties involved in managing an organization doing business in many different countries;


▪	the ability to comply with, or impact of complying with, complex and changing laws, regulations and economic political policies of the U.S. government, including U.S. laws and regulations relating to economic sanctions, export controls and anti-boycott requirements;


▪	increase in an anti-American sentiment and the identification of the licensed brand as an American brand;


▪	the effect of disruptions caused by severe weather, natural disasters, outbreak of disease or other events that make travel to a particular region less attractive or more difficult; and


▪	political and economic instability.

Any or all of these factors may adversely affect the performance of and licensing revenues we receive from our licensed Shacks located in international markets. Our international licensed Shacks operate in several volatile regions that are subject to geopolitical and socio-political factors that pose risk to our business operations. In the past, our licensee has been negatively impacted by currency devaluation in Russia and we have seen a reduction in licensing revenue from our Russian Shacks. In addition, the economy of any region in which our Shacks are located may be adversely affected to a greater degree than that of other areas of the country or the world by certain developments affecting industries concentrated in that region or country. For example, our Shacks located in the Middle East have, in the past, suffered from violence and political unrest, as well as depressed oil prices with declines in traffic

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experienced throughout the region, and in 2017, our licensee in the Middle East closed two Shacks; it is possible that our licensee may choose to close more of these Shacks in the future. While these factors and the impact of these factors are difficult to predict, any one or more of them could lower our revenues, increase our costs, reduce our profits or disrupt our business, and, as our international licensed operations increase, these risks will become more pronounced.

We depend on key members of our executive management team.

We depend on the leadership and experience of key members of our executive management team. The loss of the services of any of our executive management team members could have a material adverse effect on our business and prospects, as we may not be able to find suitable individuals to replace such personnel on a timely basis or without incurring increased costs, or at all. We do not maintain key person life insurance policies on any of our executive officers. We believe that our future success will depend on our continued ability to attract and retain highly skilled and qualified personnel. There is a high level of competition for experienced, successful personnel in our industry. Our inability to meet our executive staffing requirements in the future could impair our growth and harm our business.

We may not be able to adequately protect our intellectual property, which, in turn, could harm the value of our brands and adversely affect our business.

Our ability to implement our business plan successfully depends in part on our ability to further build brand recognition using our trademarks, service marks, proprietary products and other intellectual property, including our name and logos and the unique character and atmosphere of our Shacks. We rely on U.S. and foreign trademark, copyright, and trade secret laws, as well as license agreements, non-disclosure agreements, and confidentiality and other contractual provisions to protect our intellectual property. Nevertheless, our competitors may develop similar menu items and concepts, and adequate remedies may not be available in the event of an unauthorized use or disclosure of our trade secrets and other intellectual property.

The success of our business depends on our continued ability to use our existing trademarks and service marks to increase brand awareness and further develop our brand in both domestic and international markets. We have registered and applied to register trademarks and service marks in the United States and foreign jurisdictions. We may not be able to adequately protect our trademarks and service marks, and our competitors and others may successfully challenge the validity and/or enforceability of our trademarks and service marks and other intellectual property. Additionally, we may be prohibited from entering into certain new markets due to restrictions surrounding competitors' trademarks. The steps we have taken to protect our intellectual property in the United States and in foreign countries may not be adequate. In addition, the laws of some foreign countries do not protect intellectual property to the same extent as the laws of the United States.

If our efforts to maintain and protect our intellectual property are inadequate, or if any third party misappropriates, dilutes or infringes on our intellectual property, the value of our brands may be harmed, which could have a material adverse effect on our business and might prevent our brands from achieving or maintaining market acceptance.

We may also from time to time be required to institute litigation to enforce our trademarks, service marks and other intellectual property. Such litigation could result in substantial costs and diversion of resources and could negatively affect our sales, profitability and prospects regardless of whether we are able to successfully enforce our rights.

Third parties may assert that we infringe, misappropriate or otherwise violate their intellectual property and may sue us for intellectual property infringement. Even if we are successful in these proceedings, we may incur substantial costs, and the time and attention of our management and other personnel may be diverted in pursuing these proceedings. If a court finds that we infringe a third party's intellectual property, we may be required to pay damages and/or be subject to an injunction. With respect to any third party intellectual property that we use or wish to use in our business (whether or not asserted against us in litigation), we may not be able to enter into licensing or other arrangements with the owner of such intellectual property at a reasonable cost or on reasonable terms.

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Our insurance coverage and self-insurance reserves may not provide adequate levels of coverage against claims.

We maintain various insurance policies for employee health, workers' compensation, general liability, and property damage. We believe that we maintain insurance customary for businesses of our size and type. However, there are types of losses we may incur that cannot be insured against or that we believe are not economically reasonable to insure. Such losses could have a material adverse effect on our business and results of operations.

Additionally, we are self-insured for our employee medical plan and we recognize a liability that represents our estimated cost of claims incurred but not reported as of the balance sheet date. Our estimated liability is based on a number of assumptions and factors, including actuarial assumptions and historical trends. Our history of claims experience is short and our significant growth rate could affect the accuracy of our estimates. If a greater amount of claims are reported, or if medial costs increase beyond what we expect, our liabilities may not be sufficient and we could recognize additional expense, which could adversely affect our results of operations.

REGULATORY AND LEGAL RISKS

We are subject to many federal, state and local laws, as well as other statutory and regulatory requirements, with which compliance is both costly and complex. Failure to comply with, or changes in these laws or requirements, could have an adverse impact on our business.

We are subject to extensive federal, state, local and foreign laws and regulations, as well as other statutory and regulatory requirements, including those related to:


▪	nutritional content labeling and disclosure requirements;


▪	food safety regulations;


▪	local licensure, building and zoning regulations;


▪	employment regulations;


▪	the Affordable Care Act;


▪	the Americans with Disabilities Act and similar state laws;


▪	privacy and cybersecurity;


▪	laws and regulations related to our licensed operations; and


▪	U.S. Foreign Corrupt Practices Act and other similar anti-bribery and anti-kickback laws;

The impact of current laws and regulations, the effect of future changes in laws or regulations that impose additional requirements and the consequences of litigation relating to current or future laws and regulations, uncertainty around future changes in laws made by new regulatory administrations or our inability to respond effectively to significant regulatory or public policy issues, could increase our compliance and other costs of doing business and, therefore, have an adverse effect on our results of operations. Failure to comply with the laws and regulatory requirements of federal, state and local authorities could result in, among other things, revocation of required licenses, administrative enforcement actions, fines and civil and criminal liability. In addition, certain laws, including the ADA, could require us to expend significant funds to make modifications to our Shacks if we failed to comply with applicable standards. Compliance with all of these laws and regulations can be costly and can increase our exposure to litigation or governmental investigations or proceedings.

Nutritional Content Labeling and Disclosure Requirements

In recent years, there has been an increased legislative, regulatory and consumer focus on the food industry including nutritional and advertising practices. These changes have resulted in, and may continue to result in, the enactment of laws and regulations that impact the ingredients and nutritional content of our menu offerings, or laws and regulations requiring us to disclose the nutritional content of our food offerings. For example, a number of states, counties and cities have enacted menu labeling laws requiring multi-unit restaurant operators to disclose certain nutritional information to customers, or have enacted legislation restricting the use of certain types of ingredients in restaurants. Furthermore, the Patient Protection and Affordable Care Act of 2010 (the "PPACA") establishes a uniform, federal requirement for certain restaurants to post certain nutritional information on their menus. Specifically,

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the PPACA amended the Federal Food, Drug and Cosmetic Act to require certain chain restaurants to publish the total number of calories of standard menu items on menus and menu boards, along with a statement that puts this calorie information in the context of a total daily calorie intake. These new labeling laws may also change consumer buying habits in a way that adversely impacts our sales. Additionally, an unfavorable report on, or reaction to, our menu ingredients, the size of our portions or the nutritional content of our menu items could negatively influence the demand for our offerings.

Food Safety Regulations

There is also a potential for increased regulation of certain food establishments in the United States, where compliance with a Hazard Analysis and Critical Control Points ("HACCP") approach may now be required. HACCP refers to a management system in which food safety is addressed through the analysis and control of potential hazards from production, procurement and handling, to manufacturing, distribution and consumption of the finished product. Many states have required restaurants to develop and implement HACCP Systems, and the United States government continues to expand the sectors of the food industry that must adopt and implement HACCP programs. For example, the Food Safety Modernization Act ("FSMA") granted the FDA new authority regarding the safety of the entire food system, including through increased inspections and mandatory food recalls. Although restaurants are specifically exempted from or not directly implicated by some of these new requirements, we anticipate that the new requirements may impact our industry. Additionally, our suppliers may initiate or otherwise be subject to food recalls that may impact the availability of certain products, result in adverse publicity or require us to take actions that could be costly for us or otherwise impact our business.

Local Licensure, Building and Zoning Regulations

The development and operation of Shacks depend, to a significant extent, on the selection of suitable sites, which are subject to zoning, land use, environmental, traffic and other regulations and requirements. We are also subject to licensing and regulation by state and local authorities relating to health, sanitation, safety and fire standards. Typically, licenses, permits and approvals under such laws and regulations must be renewed annually and may be revoked, suspended or denied renewal for cause at any time if governmental authorities determine that our conduct violates applicable regulations. Difficulties or failure to maintain or obtain the required licenses, permits and approvals could adversely affect our existing Shacks and delay or result in our decision to cancel the opening of new Shacks, which would adversely affect our business.

Employment Regulations

We are subject to various federal and state laws governing our employment practices, including laws relating to minimum wage requirements, employee classifications as exempt or non-exempt, payroll and unemployment tax laws, requirements to provide meal and rest periods or other benefits, family leave mandates, requirements regarding working conditions and accommodations to certain employees, citizenship and work authorization requirements, insurance and workers' compensation rules, scheduling notification requirements and anti-discrimination laws. Compliance with these regulations is costly and requires significant resources. For example, in November 2017 the Fair Workweek legislation was implemented in New York City, which requires fast food employers to provide employees with specified notice in scheduling changes and pay premiums for changes made to employees' schedules, amongst other requirements. Similar legislation may be enacted in other jurisdictions we operate as well, and in turn, could result in increased costs. Additionally, we may suffer losses from or incur significant costs to defend claims alleging non-compliance.

Although none of our employees are currently covered under collective bargaining agreements, our employees may elect to be represented by labor unions in the future. If a significant number of our employees were to become unionized and collective bargaining agreement terms were significantly different from our current compensation arrangements, it could adversely affect our business, financial condition or results of operations. In addition, a labor dispute involving some or all of our employees may harm our reputation, disrupt our operations and reduce our revenues, and resolution of disputes may increase our costs. Further, if we enter into a new market with unionized construction companies, or the construction companies in our current markets become unionized, construction and build out costs for new Shacks in such markets could materially increase.

The Affordable Care Act

Under the PPACA, we are required to provide affordable coverage, as defined in the PPACA, to substantially all full-time employees, or otherwise be subject to potential excise tax penalties based on the affordability criteria in the PPACA. Additionally, some states and localities have passed state and local laws mandating the provision of certain levels of health benefits by some employers. Increased health care and insurance costs, as well as the potential increase in participation by our employees who previously had

Shake Shack Inc.

Form 10-K | 35

not participated in our medical plan coverage, could have a material adverse effect on our business, financial condition and results of operations.

Americans with Disabilities Act and Similar State Laws

We are subject to the U.S. American with Disabilities Act ("ADA") and similar state laws, which, among other things, prohibits discrimination in employment and public accommodations on the basis of disability. Under the ADA, our Shacks are required to meet federally mandated requirements for the disabled and we could be required to incur expenses to modify our Shacks to provide service to, or make reasonable accommodations for the employment of, disabled persons. The expenses associated with these modifications, or any damages, legal fees and costs associated with resolving ADA-related complaints could be material.

Privacy and Cybersecurity

Our business requires the collection, transmission and retention of large volumes of guest and employee data, including credit and debit card numbers and other personally identifiable information, in various information technology systems that we maintain and in those maintained by third parties with whom we contract to provide services. The collection and use of such information is regulated at the federal and state levels, as well as by the European Union (EU), in which regulatory requirements have been increasing. As our environment continues to evolve in this digital age and reliance upon new technologies, for example cloud computing, become more prevalent, it is imperative we secure the private and sensitive information we collect. Failure to do so, whether through fault of our own information systems or those of outsourced third party providers, could not only cause us to fail to comply with these laws and regulations, but also could cause us to face litigation and penalties that could adversely affect our business, financial condition and results of operations. Our brand's reputation and our image as an employer could also be harmed by these types of security breaches or regulatory violations.

Laws and Regulations Relating to Our Licensed Operations

Our licensing operations are subject to laws enacted by a number of states, rules and regulations promulgated by the U.S. Federal Trade Commission and certain rules and requirements regulating licensing activities in foreign countries. Failure to comply with new or existing licensing laws, rules and regulations in any jurisdiction or to obtain required government approvals could negatively affect our licensing sales and our relationships with our licensees.

U.S. Foreign Corrupt Practices Act and Similar Anti-Bribery and Anti-Kickback Laws

A significant portion of our licensed operations are located outside the United States. The U.S. Foreign Corrupt Practices Act, and other similar anti-bribery and anti-kickback laws and regulations, generally prohibit companies and their intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business. While our license agreements mandate compliance with applicable law, we cannot assure you that we will be successful in preventing our employees or other agents from taking actions in violation of these laws or regulations. Such violations, or allegations of such violations, could disrupt our business and result in a material adverse effect on our financial condition, results of operations and cash flows.

Changes in effective tax rates or adverse outcomes resulting from examination of our income or other tax returns could adversely affect our results of operations and financial condition.

We are subject to taxes by the U.S. federal, state, local and foreign tax authorities, and our tax liabilities will be affected by the allocation of expenses to differing jurisdictions. Our future effective tax rates could be subject to volatility or adversely affected by a number of factors, including:


▪	changes in the valuation of our deferred tax assets and liabilities;


▪	expected timing and amount of the release of any tax valuation allowance;


▪	tax effects of stock-based compensation;


▪	changes in tax laws, regulations or interpretations thereof, including the Tax Cuts and Jobs Act that was enacted in December 2017; or


▪	future earnings being lower than anticipated in jurisdictions where we have lower statutory tax rates and higher than anticipated earnings in jurisdictions where we have higher statutory tax rates.

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We may also be subject to audits of our income, sales and other transaction taxes by U.S. federal, state, local and foreign taxing authorities. Outcomes from these audits could have an adverse effect on our operating results and financial condition.

Additionally, SSE Holdings is treated as a partnership for U.S. federal income tax purposes, and the SSE Holdings LLC Agreement restricts transfers of LLC Interests that would cause SSE Holdings to be treated as a "publicly traded partnership" for U.S. federal income tax purposes. If the Internal Revenue Service ("IRS") were to contend successfully that SSE Holdings should be treated as a “publicly traded partnership” for U.S. federal income tax purposes, SSE Holdings would be treated as a corporation for U.S. federal income tax purposes and thus would be subject to entity-level tax on its taxable income, which could have a material adverse effect on our results of operations, financial position and cash flows.

If we fail to maintain effective internal controls over financial reporting, our ability to produce timely and accurate financial information or comply with Section 404 of the Sarbanes-Oxley Act of 2002 could be impaired, which could have a material adverse effect on our business and stock price.

As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, (the "Exchange Act"), the Sarbanes-Oxley Act of 2002, as amended (the "Sarbanes-Oxley Act"), and the listing standards of the New York Stock Exchange.

The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. It also requires annual management assessments of the effectiveness of our internal control over financial reporting and disclosure of any material weaknesses in such controls. Additionally, as we are no longer considered an emerging growth company, we are now required to have our independent registered public accounting firm provide an attestation report on the effectiveness of our internal control over financial reporting. In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, we have expended, and anticipate that we will continue to expend, significant resources, including accounting-related costs and significant management oversight. We expect that the requirements of these rules and regulations will continue to increase our legal, accounting and financial compliance costs, make some activities more difficult, time consuming and costly, and place significant strain on our personnel, systems and resources.

Any failure to develop or maintain effective controls, or any difficulties encountered in their implementation or improvement, could harm our operating results or cause us to fail to meet our reporting obligations and may result in a restatement of our financial statements for prior periods. Any failure to implement and maintain effective internal control over financial reporting also could adversely affect the results of management evaluations and independent registered public accounting firm audits of our internal control over financial reporting that we are required to include in our periodic reports that will be filed with the SEC. Ineffective disclosure controls and procedures and internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, which may have a negative effect on the trading price of our Class A common stock. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on the New York Stock Exchange.

Shake Shack Inc.

Form 10-K | 37

RISKS RELATED TO OUR ORGANIZATIONAL STRUCTURE

Shake Shack has non-controlling interest holders, whose interests may differ from those of our public stockholders.

As of December 27, 2017, the non-controlling interest holders control approximately 39.7% of the combined voting power of our common stock through their ownership of both our Class A and Class B common stock. The non-controlling interest holders, for the foreseeable future, have influence over corporate management and affairs, as well as matters requiring stockholder approval. The non-controlling interest holders are able to, subject to applicable law and the voting arrangements, participate in the election of a majority of the members of our Board of Directors and actions to be taken by us and our Board of Directors, including amendments to our certificate of incorporation and bylaws and approval of significant corporate transactions, including mergers and sales of substantially all of our assets. The directors so elected will have the authority, subject to the terms of our indebtedness and applicable rules and regulations, to issue additional stock, implement stock repurchase programs, declare dividends and make other decisions. It is possible that the interests of the non-controlling interest holders may in some circumstances conflict with our interests and the interests of our other stockholders. For example, the non-controlling interest holders may have different tax positions from us, especially in light of the tax receivable agreement we entered into with the non-controlling interest holders that provides for the payment by us to the non-controlling interest holders of 85% of the amount of any tax benefits that we actually realize, or in some cases are deemed to realize (the "Tax Receivable Agreement"). This could influence their decisions regarding whether and when to dispose of assets, whether and when to incur new or refinance existing indebtedness, and whether and when Shake Shack should terminate the Tax Receivable Agreement and accelerate its obligations thereunder. In addition, the determination of future tax reporting positions, the structuring of future transactions and the handling of any future challenges by any taxing authorities to our tax reporting positions may take into consideration these non-controlling interest holders' tax or other considerations, which may differ from the considerations of us or our other stockholders.

In addition, certain of the non-controlling interest holders are in the business of making or advising on investments in companies and may hold, and may from time to time in the future acquire interests in or provide advice to businesses that directly or indirectly compete with certain portions of our business or the business of our suppliers. Our amended and restated certificate of incorporation provides that, to the fullest extent permitted by law, none of the non-controlling interest holders or any director who is not employed by us or his or her affiliates has any duty to refrain from engaging in a corporate opportunity in the same or similar lines of business as us. The non-controlling interest holders may also pursue acquisitions that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us.

Our organizational structure, including the Tax Receivable Agreement, confers certain benefits upon the non-controlling interest holders that will not benefit Class A common stockholders to the same extent as it will benefit the non-controlling interest holders.

We are a party to the Tax Receivable Agreement with the non-controlling interest holders. Under the Tax Receivable Agreement, we are required to make cash payments to the non-controlling interest holders equal to 85% of the tax benefits, if any, that we actually realize, or in certain circumstances are deemed to realize, as a result of (i) the increases in the tax basis of the net assets of SSE Holdings resulting from any redemptions or exchanges of LLC Interests from the non-controlling interest holders and (ii) certain other tax benefits related to our making payments under the Tax Receivable Agreement.

We expect that the amount of the cash payments that we are required to make under the Tax Receivable Agreement will be significant. Any payments made by us to the non-controlling interest holders under the Tax Receivable Agreement will generally reduce the amount of overall cash flow that might have otherwise been available to us. Furthermore, our future obligation to make payments under the Tax Receivable Agreement could make us a less attractive target for an acquisition, particularly in the case of an acquirer that cannot use some or all of the tax benefits that are the subject of the Tax Receivable Agreement. Payments under the Tax Receivable Agreement are not conditioned on any non-controlling interest holders continued ownership of LLC Interests or our Class A common stock after the IPO.

The actual amount and timing of any payments under the Tax Receivable Agreement, will vary depending upon a number of factors, including the timing of redemptions or exchanges by the holders of LLC Interests, the amount of gain recognized by such holders of LLC Interests, the amount and timing of the taxable income we generate in the future, and the federal tax rates then applicable.

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The non-controlling interest holders have the right to have their LLC Interests redeemed or exchanged into shares of Class A common stock, which may cause volatility in our stock price.

We have an aggregate of 173,472,523 shares of Class A common stock authorized but unissued, including 10,250,007 shares of Class A common stock issuable upon the redemption or exchange of LLC Interests held by the non-controlling interest holders. Subject to certain restrictions set forth in the SSE Holdings LLC Agreement, the non-controlling interest holders are entitled to have their LLC Interests redeemed or exchanged for shares of our Class A common stock.

We cannot predict the timing or size of any future issuances of our Class A common stock resulting from the redemption or exchange of LLC Interests or the effect, if any, that future issuances and sales of shares of our Class A common stock may have on the market price of our Class A common stock. Sales or distributions of substantial amounts of our Class A common stock, including shares issued in connection with an acquisition, or the perception that such sales or distributions could occur, may cause the market price of our Class A common stock to decline.

We will continue to incur relatively outsized costs as a result of becoming a public company and in the administration of our complex organizational structure.

As a newly public company, we will incur significant legal, accounting, insurance and other expenses that we did not incur as a private company, including costs associated with public company reporting requirements. We have also incurred and will continue to incur costs associated with compliance with the Sarbanes-Oxley Act and related rules implemented by the SEC. The expenses incurred by public companies generally for reporting and corporate governance purposes have been increasing. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming. These laws and regulations could also make it more difficult or costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our common stock, fines, sanctions and other regulatory action and potentially civil litigation.

Our organizational structure, including our Tax Receivable Agreement, is very complex and we require the expertise of various tax, legal and accounting advisers to ensure compliance with applicable laws and regulations. We have and will continue to incur significant expenses in connection with the administration of our organizational structure. As a result, our expenses for legal, tax and accounting compliance may be significantly greater than other companies of our size that do not have a similar organizational structure or a tax receivable agreement in place.

Our anti-takeover provisions could prevent or delay a change in control of our Company, even if such change in control would be beneficial to our stockholders.

Provisions of our amended and restated certificate of incorporation and amended and restated bylaws, as well as provisions of Delaware law could discourage, delay or prevent a merger, acquisition or other change in control of our Company, even if such change in control would be beneficial to our stockholders. These provisions include:


▪	authorizing the issuance of "blank check" preferred stock that could be issued by our Board of Directors to increase the number of outstanding shares and thwart a takeover attempt;


▪	establishing a classified board of directors so that not all members of our Board of Directors are elected at one time;


▪	the removal of directors only for cause;


▪	prohibiting the use of cumulative voting for the election of directors;


▪	limiting the ability of stockholders to call special meetings or amend our bylaws;


▪	requiring all stockholder actions to be taken at a meeting of our stockholders; and


▪	establishing advance notice and duration of ownership requirements for nominations for election to the Board of Directors or for proposing matters that can be acted upon by stockholders at stockholder meetings.

These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and cause us to take other corporate actions you desire. In addition, because our Board of Directors is responsible for appointing the members of our management team, these provisions could in turn affect any attempt by our stockholders to replace current members of our management team.

Shake Shack Inc.

Form 10-K | 39

In addition, the Delaware General Corporation Law (the "DGCL"), to which we are subject, prohibits us, except under specified circumstances, from engaging in any mergers, significant sales of stock or assets or business combinations with any stockholder or group of stockholders who owns at least 15% of our common stock.

The provision of our certificate of incorporation requiring exclusive venue in the Court of Chancery in the State of Delaware for certain types of lawsuits may have the effect of discouraging lawsuits against our directors and officers.

Our amended and restated certificate of incorporation requires, to the fullest extent permitted by law, that (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders, (iii) any action asserting a claim against us arising pursuant to any provision of the DGCL or our amended and restated certificate of incorporation or the bylaws or (iv) any action asserting a claim against us governed by the internal affairs doctrine will have to be brought only in the Court of Chancery in the State of Delaware. Although we believe this provision benefits us by providing increased consistency in the application of Delaware law in the types of lawsuits to which it applies, the provision may have the effect of discouraging lawsuits against our directors and officers.

We do not currently expect to pay any cash dividends.

The continued operation and expansion of our business will require substantial funding. Accordingly, we do not currently expect to pay any cash dividends on shares of our Class A common stock. Any determination to pay dividends in the future will be at the discretion of our Board of Directors and will depend upon our results of operations, financial condition, contractual restrictions, restrictions imposed by applicable law and other factors our Board of Directors deems relevant. We are a holding company, and substantially all of our operations are carried out by SSE Holdings and its subsidiaries. Under the Revolving Credit Facility, SSE Holdings is currently restricted from paying cash dividends, and we expect these restrictions to continue in the future. Our ability to pay dividends may also be restricted by the terms of any future credit agreement or any future debt or preferred equity securities of ours or of our subsidiaries. Accordingly, if you purchase shares in this offering, realization of a gain on your investment will depend on the appreciation of the price of our Class A common stock, which may never occur. Investors seeking cash dividends in the foreseeable future should not purchase our Class A common stock.

RISKS RELATED TO OUR TAX RECEIVABLE AGREEMENT

We are a holding company and our principal asset is our interest in SSE Holdings, and, accordingly, we will depend on distributions from SSE Holdings to pay our taxes and expenses, including payments under the Tax Receivable Agreement. SSE Holdings' ability to make such distributions may be subject to various limitations and restrictions.

We are a holding company and have no material assets other than our ownership interest in SSE Holdings and certain deferred tax assets. As such, we will have no independent means of generating revenue or cash flow, and our ability to pay our taxes and operating expenses or declare and pay dividends in the future, if any, will be dependent upon the distributions we receive from SSE Holdings. There can be no assurance that SSE Holdings will generate sufficient cash flow to distribute funds to us or that applicable state law and contractual restrictions, including negative covenants in our debt instruments, will permit such distributions.

SSE Holdings is treated as a partnership for U.S. federal income tax purposes and, as such, will not be subject to any entity-level U.S. federal income tax. Instead, taxable income will be allocated to its members, including us. Accordingly, we will incur income taxes on our allocable share of any net taxable income of SSE Holdings. Under the terms of the SSE Holdings LLC Agreement, SSE Holdings is obligated to make tax distributions to its members, including us. In addition to tax expenses, we will also incur expenses related to our operations, including payments under the Tax Receivable Agreement, which we expect will be significant. We intend, as its managing member, to cause SSE Holdings to make cash distributions to its members in an amount sufficient to (i) fund all or part of their tax obligations in respect of taxable income allocated to them and (ii) cover our operating expenses, including payments under the Tax Receivable Agreement. However, SSE Holdings' ability to make such distributions may be subject to various limitations and restrictions, such as restrictions on distributions that would either violate any contract or agreement to which SSE Holdings is then a party, including debt agreements, or any applicable law, or that would have the effect of rendering SSE Holdings insolvent. If we do not have sufficient funds to pay our tax and other liabilities or to fund our operations, we may have to borrow funds, which could materially adversely affect our liquidity and financial condition and subject us to various restrictions imposed by any such

40 | Shake Shack Inc.

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lenders. To the extent that we are unable to make payments under the Tax Receivable Agreement for any reason, such payments generally will be deferred and will accrue interest until paid; provided, however, that nonpayment for a specified period may constitute a material breach of a material obligation under the Tax Receivable Agreement and therefore accelerate payments due under the Tax Receivable Agreement. In addition, if SSE Holdings does not have sufficient funds to make distributions, our ability to declare and pay cash dividends will also be restricted or impaired.

In certain cases, payments under the Tax Receivable Agreement to the non-controlling interest holders may be accelerated or significantly exceed the actual benefits we realize in respect of the tax attributes subject to the Tax Receivable Agreement.

The Tax Receivable Agreement provides that, upon certain mergers, asset sales, other forms of business combinations or other changes of control or if, at any time, we elect an early termination of the Tax Receivable Agreement, our obligations, or our successor's obligations, under the Tax Receivable Agreement to make payments thereunder would be based on certain assumptions, including an assumption that we would have sufficient taxable income to fully utilize all potential future tax benefits that are subject to the Tax Receivable Agreement.

As a result of the foregoing, (i) we could be required to make payments under the Tax Receivable Agreement that are greater than the specified percentage of the actual benefits we ultimately realize in respect of the tax benefits that are subject to the Tax Receivable Agreement and (ii) if we elect to terminate the Tax Receivable Agreement early, we would be required to make an immediate cash payment equal to the present value of the anticipated future tax benefits that are the subject of the Tax Receivable Agreement, which payment may be made significantly in advance of the actual realization, if any, of such future tax benefits. In these situations, our obligations under the Tax Receivable Agreement could have a substantial negative impact on our liquidity and could have the effect of delaying, deferring or preventing certain mergers, asset sales, other forms of business combinations or other changes of control. There can be no assurance that we will be able to fund or finance our obligations under the Tax Receivable Agreement.

We will not be reimbursed for any payments made to the non-controlling interest holders under the Tax Receivable Agreement in the event that any tax benefits are disallowed.

Payments under the Tax Receivable Agreement will be based on the tax reporting positions that we determine, and the IRS or another tax authority may challenge all or part of the tax basis increases, as well as other related tax positions we take, and a court could sustain such challenge. If the outcome of any such challenge would reasonably be expected to materially affect a recipient's payments under the Tax Receivable Agreement, then we will not be permitted to settle or fail to contest such challenge without the consent (not to be unreasonably withheld or delayed) of each non-controlling interest holder that directly or indirectly owns at least 10% of the outstanding LLC Interests. We will not be reimbursed for any cash payments previously made to the non-controlling interest holders under the Tax Receivable Agreement in the event that any tax benefits initially claimed by us and for which payment has been made to non-controlling interest holders are subsequently challenged by a taxing authority and are ultimately disallowed. Instead, any excess cash payments made by us to non-controlling interest holders will be netted against any future cash payments that we might otherwise be required to make to such non-controlling interest holders under the terms of the Tax Receivable Agreement. However, we might not determine that we have effectively made an excess cash payment to a non-controlling interest holder for a number of years following the initial time of such payment and, if any of our tax reporting positions are challenged by a taxing authority, we will not be permitted to reduce any future cash payments under the Tax Receivable Agreement until any such challenge is finally settled or determined. As a result, payments could be made under the Tax Receivable Agreement in excess of the tax savings that we realize in respect of the tax attributes with respect to non-controlling interest holders that are the subject of the Tax Receivable Agreement.

Item 1B. Unresolved Staff Comments.

None.

Shake Shack Inc.

Form 10-K | 41

Item 2. Properties.

Our home office is located at 24 Union Square East, 5th Floor, New York, NY 10003. We lease our home office, which is approximately 10,500 square feet and all of our domestic company-operated Shacks. We do not own any real property, nor do we own or lease any property related to our licensed operations. The following table sets forth the number of company-operated and licensed Shacks by geographic location as of December 27, 2017.



	Company Operated	Licensed	Total
Arizona	3	—	3
California	7	1	8
Connecticut	3	—	3
Delaware	1	—	1
District of Columbia	6	1	7
Florida	6	—	6
Georgia	2	—	2
Illinois	4	—	4
Kentucky	1	—	1
Maryland	3	1	4
Massachusetts	5	—	5
Michigan	2	—	2
Minnesota	1	—	1
Missouri	1	—	1
Nevada	4	1	5
New Jersey	4	—	4
New York	23	4	27
Pennsylvania	4	1	5
Texas	7	1	8
Virginia	2	—	2
Wisconsin	1	—	1
Domestic	90	10	100
Bahrain	—	2	2
Japan	—	6	6
Korea	—	5	5
Kuwait	—	8	8
Oman	—	1	1
Qatar	—	4	4
Russia	—	3	3
Saudi Arabia	—	7	7
Turkey	—	3	3
United Arab Emirates	—	12	12
United Kingdom	—	8	8
INTERNATIONAL	—	59	59
SYSTEM-WIDE	90	69	159

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Item 3. Legal Proceedings

In November 2015, we participated in a voluntary mediation with counsel representing two former Shake Shack managers, who alleged that we improperly classified our restaurant managers as exempt from overtime protections. At the conclusion of the mediation, the parties mutually agreed to fully and finally resolve the matter by settling, rather than litigating. In connection with the settlement, the parties entered into a memorandum of understanding, pursuant to which we agreed to create a settlement fund in the amount of $0.8 million and, in exchange for their participation in the settlement fund, all participating employees (current and former) were required to release Shake Shack from all federal and/or state wage and hour claims that may exist through the settlement date. On March 11, 2016, as required by the memorandum of understanding, the parties entered into a settlement agreement in the amount of $0.8 million. To facilitate the resolution of the matter, the parties coordinated the filing by the plaintiff's counsel of a Complaint on March 17, 2016 with the Supreme Court of the State of New York (the “Court”). On October 25, 2016, the Court granted preliminary approval of the settlement agreement. On December 13, 2016, all eligible class members were mailed the notice of settlement, and the deadline to opt-out or object was January 27, 2017. On March 7, 2017, the Court held a fairness hearing, at which time it determined that the settlement agreement was fair, adequate and equitable, and subsequently issued its order granting final approval of the settlement. On May 1, 2017, we paid to the claims administrator $0.8 million in full satisfaction of the amounts owed by us under the settlement agreement and related expenses.

We are subject to various legal proceedings, claims and liabilities, such as employment-related claims and slip and fall cases, which arise in the ordinary course of business and are generally covered by insurance. As of December 27, 2017, the amount of ultimate liability with respect to these matters was not material.

Item 4. Mine Safety Disclosures.

Not applicable.

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Form 10-K | 43

Part II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

MARKET INFORMATION

Our Class A common stock is traded on the New York Stock Exchange under the symbol "SHAK." The table below sets forth the high and low sales prices of our Class A common stock as reported on the New York Stock Exchange during each quarter of fiscal 2017 and 2016.



	2017				2016
	High		Low		High		Low
First Quarter	$	39.70	$	30.36	$	43.99	$	30.00
Second Quarter	$	39.57	$	32.07	$	38.96	$	33.10
Third Quarter	$	35.78	$	30.12	$	42.94	$	33.76
Fourth Quarter	$	46.90	$	32.25	$	39.51	$	30.90

Our Class B common stock is not listed nor traded on any stock exchange.

HOLDERS OF RECORD

As of February 14, 2018, there were 69 shareholders of record of our Class A common stock. The number of record holders does not include persons who held shares of our Class A common stock in nominee or "street name" accounts through brokers. As of February 14, 2018, there were 35 shareholders of record of our Class B common stock.

DIVIDEND POLICY

We currently intend to retain all available funds and any future earnings for use in the operation of our business, and therefore we do not currently expect to pay any cash dividends on our Class A common stock. Holders of our Class B common stock are not entitled to participate in any dividends declared by our Board of Directors. Any future determination to pay dividends to holders of our Class A common stock will be at the discretion of our Board of Directors and will depend upon many factors, including our results of operations, financial condition, capital requirements, restrictions in SSE Holdings' debt agreements and other factors that our Board of Directors deems relevant. We are a holding company, and substantially all of our operations are carried out by SSE Holdings and its subsidiaries. Additionally, under the Revolving Credit Facility, SSE Holdings is currently restricted from paying cash dividends, and we expect these restrictions to continue in the future, which may in turn limit our ability to pay dividends on our Class A common stock.

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SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY INCENTIVE PLANS

The following table provides information about our compensation plans under which our Class A common stock is authorized for issuance, as of December 27, 2017:



Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuances under equity compensation plans
Equity compensation plans approved by security holders⁽¹⁾	1,888,659	$	21.16	3,434,919


(1)	Includes awards granted and available to be granted under our 2015 Incentive Award Plan.

STOCK PERFORMANCE GRAPH

The following graph and table illustrate the total return from January 30, 2015 through December 27, 2017 for (i) our Class A common stock, (ii) the Standard and Poor's 500 Index, and (iii) the Standard and Poor’s 600 Restaurants Index, assuming an investment of $100 on January 30, 2015 including the reinvestment of dividends.

Comparison of 35 Month Cumulative Total Return



	1/30/2015		7/1/2015		12/30/2015		6/29/2016		12/28/2016		6/28/2017		12/27/2017
Shake Shack Inc.	$	100.00	$	130.81	$	87.06	$	80.22	$	80.24	$	77.65	$	96.60
S&P 500 Index	100.00		104.36		104.52		108.53		117.02		127.95		142.57
S&P 600 Restaurants Index	100.00		101.86		89.60		88.03		94.50		91.16		91.75

Shake Shack Inc.

Form 10-K | 45

Item 6. Selected Financial Data.

The selected financial and operating data set forth below was derived from our audited consolidated financial statements and should be read in conjunction with Item 1A, "Risk Factors," Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our audited consolidated financial statements included in Item 8, "Financial Statements and Supplementary Data."



(dollar amounts in thousands, except per share amounts)	2017			2016			2015			2014⁽¹⁾			2013
Selected statement of income data:
Shack sales	$	346,388		$	259,350		$	183,219		$	112,042		$	78,587
Licensing revenue	12,422			9,125			7,373			6,488			3,869
Shack-level operating expenses	254,079			186,058			130,345			85,181			58,168
General and administrative expenses	39,003			30,556			37,825			18,187			12,453
Pre-opening costs	9,603			9,520			5,430			6,105			2,334
Operating income	33,813			27,805			6,753			3,143			5,935
Net income	8,884			22,146			3,124			2,118			5,423
Net income (loss) attributable to Shake Shack Inc.	(320		)	12,446			(8,776		)	2,118			5,423

Per share data:
Earnings (loss) per share—basic	$	(0.01	)	$	0.54		$	(0.65	)	$	0.07		$	0.18
Earnings (loss) per share—diluted	$	(0.01	)	$	0.53		$	(0.65	)	$	0.07		$	0.18

Selected balance sheet data (at period end):
Cash and cash equivalents	$	21,507		$	11,607		$	70,849		$	2,677		$	13,076
Short-term marketable securities	63,036			62,040			275			—			—
Total current assets	93,199			83,944			78,934			7,925			15,207
Total assets	470,606			538,194			379,547			82,962			55,219
Total current liabilities	34,024			31,716			24,005			48,177			7,205
Total debt	14,518			2,007			313			32,313			313
Total liabilities	246,127			336,841			222,528			70,362			17,832
Total equity	224,479			201,353			157,019			12,600			37,387

Selected cash flow data:
Net cash provided by operating activities	$	70,878		$	54,285		$	41,258		$	13,584		$	12,924
Net cash used in investing activities	(61,943		)	(114,761		)	(34,514		)	(28,515		)	(16,194		)
Net cash provided by financing activities	965			1,234			61,428			4,532			313

46 | Shake Shack Inc.

Form 10-K



(dollar amounts in thousands)		2017			2016			2015			2014⁽¹⁾			2013
Selected operating data:
System-wide sales⁽²⁾		$	532,137		$	402,791		$	295,257		$	217,442		$	139,903
Same-Shack sales growth⁽³⁾		(1.2		)%	4.2		%	13.3		%	4.1		%	5.9		%
Shacks in the comparable base		43			29			21			13			8
Average weekly sales⁽⁴⁾:
	Domestic company-operated	$	88		$	96		$	96		$	89		$	96
Average unit volumes⁽⁵⁾:
	Domestic company-operated	$	4,598		$	4,981		$	4,976		$	4,611		$	5,017
	International licensed	$	3,176		$	3,334		$	3,413		$	4,588		$	6,077
Shack-level operating profit⁽⁶⁾		$	92,309		$	73,292		$	52,874		$	26,861		$	20,419
Shack-level operating profit margin⁽⁶⁾		26.6		%	28.3		%	28.9		%	24.0		%	26.0		%
Adjusted EBITDA⁽⁷⁾		$	64,664		$	50,234		$	37,011		$	14,862		$	12,722
Adjusted EBITDA margin⁽⁷⁾		18.0		%	18.7		%	19.4		%	12.5		%	15.4		%
Shack counts (at end of period):
	System-wide	159			114			84			63			40
	Domestic company-operated	90			64			44			31			21
	Domestic licensed	10			7			5			5			4
	International licensed	59			43			35			27			15


(1)	We operate on a 52/53 week fiscal year that ends on the last Wednesday of the calendar year. Fiscal 2017, 2016, 2015 and 2013 each contained 52 weeks. Fiscal 2014 was a 53-week year with the extra operating week (the "53rd week") falling in our fiscal fourth quarter.

(2)

System-wide sales consists of sales from our domestic company-operated Shacks, our 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 fees and opening fees.


(3)	Same-Shack sales growth reflects the change in year-over-year Shack sales for domestic company-operated Shacks open for 24 full fiscal months or longer. Same-Shack sales growth for fiscal 2014 excludes sales from the 53rd week.


(4)	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 used in the denominator such that it corresponds to the period of associated sales.


(5)	Average unit volumes ("AUVs") are 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 used in the denominator such that it corresponds to the period of associated sales.


(6)	See "Non-GAAP Measures—Shack-Level Operating Profit" on page 58 for additional information and a reconciliation to the most directly comparable GAAP financial measure.


(7)	See "Non-GAAP Measures—EBITDA and Adjusted EBITDA" on page 59 for additional information and a reconciliation to the most directly comparable GAAP financial measure.

Shake Shack Inc.

Form 10-K | 47

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

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. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements can also be identified by words such as "aim," "anticipate," "believe," "estimate," "expect," "forecast," "future," "intend," "outlook," "plan," "potential," "predict," "project," "seek," "may," "can," "will," "would," "could," "should," the negatives thereof and other similar expressions. Forward-looking statements are not guarantees of future performance and actual results may differ significantly from the results discussed in the forward-looking statements. All forward-looking statements are expressly qualified in their entirety by these cautionary statements. Factors that might cause such differences include, but are not limited to, those discussed in Part I, Item 1A of this Form 10-K under the heading “Risk Factors,” which are incorporated herein by reference. The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included in Part II, Item 8 of this Form 10-K. 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. We undertake no obligation to revise or update any forward-looking statements for any reason, except as required by law.

OVERVIEW

Shake Shack is a modern day "roadside" burger stand serving a classic American menu of premium burgers, hot dogs, crispy chicken, crinkle cut fries, shakes, frozen custard, beer and wine. Our fine dining heritage and commitment to community building, hospitality and the sourcing of premium ingredients is what we call "fine casual." Fine casual couples the ease, value and convenience of fast casual concepts with the high standards of excellence grounded in our fine dining heritage—thoughtful ingredient sourcing and preparation, hospitality and quality.

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.

FISCAL 2017 HIGHLIGHTS

Fiscal 2017 was another strong year for Shake Shack. We surpassed our targeted growth plan and opened 26 domestic company-operated Shacks. We entered a number of new major markets this year—making our debut in downtown Detroit, San Antonio in the Park North Shopping Center, two Shack openings in San Diego in Mission Valley and UTC, Wisconsin and Missouri, with an opening in Danny Meyer's hometown of St. Louis. We also deepened our roots in our current markets, opening Shacks in the DC market, Connecticut, California, Texas, Illinois, Florida, New York, New Jersey and Nevada. Internationally, we expanded our footprint by opening 16 net new licensed Shacks, with three new Shacks in Japan, bringing our total to six Shacks in Japan, and two more Shacks in South Korea, bringing our total to five Shacks in South Korea, as well as further expanding our footprint in the Middle East and United Kingdom. Additionally, we opened three domestic licensed Shacks, including our expansion in the sporting events arena at Minute Maid Park in Houston and M&T Bank Stadium in Baltimore, as well as a new airport Shack in LAX Terminal 3.

Fiscal 2017 marked a year of continued menu innovation, from the pop-ups and promotions we ran, to the collaborations we had with amazing chefs around the country and world, to our dynamic limited time offering ("LTO") program we continued throughout the year. For our LTOs this year, we featured new premium items across the menu—including burgers, chicken and fries. Starting

48 | Shake Shack Inc.

Form 10-K

in February, we rolled out our BBQ lineup and followed it with our chili menu starting in October. In fiscal 2017 we switched from offering the Shake of the Week to our Trio of Featured of Shakes, where we offered a trio of premium shakes at various times of the year.

We also made big investments in our digital strategy. We launched our mobile-ordering Shack App nationwide for IOS in January 2017, and to mark the occasion, we rewarded each guest who downloaded the Shack App with a free single ShackBurger. Subsequently in July 2017 we launched our Android version of the Shack App. Guests can order a ShackBurger, crinkle cut fries and frozen custard—all from their phone. The launch of our Shack App is just another way we are trying to meet our guests where they are and giving a whole new way to experience Shake Shack. We also introduced self-serve kiosks for in-Shack ordering at a couple of our New York City Shacks. Our Astor Place Shack in Manhattan opened as the first Shack with a kiosk-only, cashless environment with hospitality champs there to help and guide guests through the kiosk experience.

In addition to launching and learning through the app, we entered into a number of integrated delivery pilots in fiscal 2017. We worked with a number of delivery service partners during this pilot phase and learned about guest demand and our various Shacks' operations as well as gained perspective on our partners and the importance of systems integration.

We also made great strides this past year in our mission to Stand For Something Good. In January 2017 we announced our U.S. Animal Welfare Policy, providing further transparency to our team, guests and suppliers and reiterating our commitment to achieving ethical and humane practices for the animals in our supply chain.

Our fiscal 2017 results demonstrate the success of our various growth strategies. Our brand power and thoughtful approach to growth have resulted in strong Shack performance across a variety of geographic areas and formats. Some financial highlights for fiscal 2017 include:


▪	Total revenue increased 33.6% to $358.8 million.


▪	Shack sales increased 33.6% to $346.4 million.


▪	Same-Shack sales decreased 1.2%.


▪	Operating income increased 21.6% to $33.8 million, or 9.4% of total revenue.


▪	Shack-level operating profit margin*, a non-GAAP measure, increased 25.9% to $92.3 million, or 26.6% of Shack sales.


▪	Net income was $8.9 million and net loss attributable to Shake Shack Inc. was $0.3 million, or $(0.01) per diluted share.


▪	Adjusted EBITDA*, a non-GAAP measure, increased 28.7% to $64.7 million.


▪	Adjusted pro forma net income*, a non-GAAP measure, increased 25.4% to $21.0 million, or $0.57 per fully exchanged and diluted share.


▪	45 net system-wide Shack openings, including 26 domestic company-operated Shacks and 19 net licensed Shacks, representing a 39.5% increase in system-wide Shack count.

* Shack-level operating profit, adjusted EBITDA and adjusted pro forma net income are non-GAAP measures. Reconciliations of Shack-level operating profit to operating income, adjusted EBITDA to net income (loss) attributable to Shake Shack Inc., and adjusted pro forma net income to net income (loss) attributable to Shake Shack Inc., the most directly comparable financial measures presented in accordance with GAAP, are set forth on pages 58–62.

TRENDS IN OUR BUSINESS

In fiscal 2017 we continued to focus on driving long-term value creation—building the community gathering places our guests love (both in the Shack and online), investing in our digital platforms, while innovating around our core menu, and further strengthening the unique culture that differentiates and drives our company forward. We plan to continue to expand our business, drive Shack sales and enhance our competitive positioning by executing on the following strategies: (i) opening new domestic company-operated Shacks; (ii) capitalizing on our outsized brand awareness; (iii) growing same-Shack sales; (iv) innovating our digital products and capabilities; and (v) thoughtfully increasing our licensed Shacks domestically and abroad.

Our primary means of growth will be opening new domestic company-operated Shacks and we believe we have a strong pipeline of Shacks for fiscal 2018. Our development strategy this year remains a balance between further penetration of existing markets,

Shake Shack Inc.

Form 10-K | 49

complemented by launches in a number of new markets, including Birmingham, Charlotte, Denver, Kansas City, Nashville, San Francisco and Seattle. We will also be growing our presence in existing markets with new Shacks planned in California, metro New York, the Mid-Atlantic, Texas and more. Internationally, we will continue to execute our strategy of licensed revenue growth through our key partnerships here and abroad, with a focus on Asia. In the summer of 2017, we announced our plans to bring Shake Shack to Hong Kong and Macau with a total of 14 Shacks to open through 2027, as well our plans to open 25 Shacks in greater Shanghai through 2028. We have another busy year planned with continued unit growth in fiscal 2018 in the Middle East and U.K.

As we continue our rapid expansion, we have begun to, and expect to continue to, enter into more “new build” spaces, where we may be considered the owner of any landlord-funded construction assets for accounting purposes (“build-to-suit leases”). Due to various forms of continuing involvement subsequent to the end of construction, we will likely be required to continue to account for these leases as a financing, which would result in higher interest expense and depreciation expense, partially offset by lower occupancy and related expenses. See “—Critical Accounting Policies and Estimates” and Note 2 to the consolidated financial statements for more information.

While we believe that there is still ample room to grow our Shack-base in our hometown of New York City, the majority of our domestic company-operated Shack growth is expected to occur outside of New York City. Because our historical average unit volumes ("AUVs") have been higher, due in large part to our concentration in urban markets, historical domestic company-operated AUVs are not a good measure of expected sales at new Shacks. As we continue to expand outside of our established markets, we continue to expect our company-wide AUV for all domestic company-operated Shacks to decline over time as Shacks of various unit volumes are introduced into the system. For fiscal 2018, we expect domestic company-operated AUV to be between $4.1 to $4.2 million.

Building upon our accomplishments with the Shack App and kiosks in fiscal 2017, we will continue to invest in and expand our digital products and capabilities across the company in fiscal 2018. Some of our digital strategies in the next year include: (i) continuing to add functionality to our online browsing and ordering experience; (ii) streamlining and removing friction points and improving the overall guest experience when engaging with Shake Shack in the digital world to build data management and analytics capabilities to deliver enhanced customer insights critical to our ongoing digital product roadmap and our other strategic growth initiatives; and (iii) delivering increasingly personalized marketing programs, allowing us to connect with our existing customers as well as potential customers, and to increasingly focus on rewarding our best customers. We plan on making investments in our people, systems and tools to build on the digital foundation we laid in 2017. We also plan on making investments in our back-office systems, in both the home office and our Shacks, to support our ongoing expansion in the most efficient manner.

We will continue to embrace our fine-dining heritage and, although our core menu remains focused, we plan to continue supplementing it with targeted innovation. In January 2018, we launched our latest LTO, the Griddled Chick’n Club—an all-natural chicken breast topped with Niman Ranch smoked bacon, lettuce, tomato and buttermilk herb mayo. We are excited to see how this option potentially expands the chicken category alongside our already successful fried Chick’n Shack.

While we believe there are significant opportunities ahead of us, we also face many challenges, along with our industry. We expect the high labor trends to continue into fiscal 2018. We believe that rising minimum wage legislation will continue to affect the entire restaurant industry, as well as increased regulatory pressures such as the Fair Work Week legislation, and we fully expect this labor pressure to continue in the future. Several states in which we operate have enacted minimum wage increases and it is possible that other states or the federal government could also enact minimum wage increases. Our primary challenge for fiscal 2018 and the next few years will be preserving our margins in the face of these rising labor costs. As more minimum wage increases are enacted, we may be required to implement additional pay increases or offer additional benefits in the future in order to attract and retain the most qualified people, which we expect to put further pressure on our operating margins. While we expect our operating profit to increase in absolute terms, we expect our Shack-level operating profit margins to decline due to the labor pressures we face coupled with the introduction of more Shacks of various unit volumes.

With only 159 Shacks system-wide, as of December 27, 2017, we still have significant whitespace opportunity ahead of us. Despite the challenges we face, we believe that we are positioned well for future growth.

50 | Shake Shack Inc.

Form 10-K

FISCAL 2018 OUTLOOK

For the fiscal year ending December 26, 2018, we are providing the following preliminary financial outlook:



	Current Outlook
Total revenue (inclusive of licensing revenue)	$444 to $448 million
Licensing revenue	$12 to $13 million
Same-Shack sales growth (%)⁽¹⁾	0%
Domestic company-operated Shack openings	32 to 35
Licensed Shack openings, net	16 to 18
Average annual sales volume for domestic company-operated Shacks	$4.1 to $4.2 million
Shack-level operating profit margin (%)	24.5% to 25.5%
General and administrative expenses⁽²⁾	$49 to $51 million
Depreciation expense	$32 million
Pre-opening costs	$12 to $13 million
Interest expense	$2 to $2.2 million
Adjusted pro forma effective tax rate (%)	26% to 27%


(1)	Includes approximately 1.5% to 2% of menu price increases taken in December 2017.


(2)	Excludes approximately $4 to $6 million of estimated costs related to Project Concrete, our operational and financial systems upgrade initiative.

FISCAL 2020 TARGETS

By the end of fiscal 2020, we are targeting:


▪	At least 200 domestic company-operated Shacks and at least 120 globally licensed Shacks (more than double the system-wide Shack count as of December 27, 2017); and


▪	Over $700 million in total revenue.

Shake Shack Inc.

Form 10-K | 51

RESULTS OF OPERATIONS

The following table summarizes our results of operations for fiscal 2017, 2016 and 2015:



(dollar amounts in thousands)		2017					2016					2015
Shack sales		$	346,388		96.5	%	$	259,350		96.6	%	$	183,219		96.1	%
Licensing revenue		12,422			3.5	%	9,125			3.4	%	7,373			3.9	%
TOTAL REVENUE		358,810			100.0	%	268,475			100.0	%	190,592			100.0	%
Shack-level operating expenses⁽¹⁾:
	Food and paper costs	98,337			28.4	%	73,752			28.4	%	54,079			29.5	%
	Labor and related expenses	91,740			26.5	%	65,540			25.3	%	44,752			24.4	%
	Other operating expenses	35,805			10.3	%	24,946			9.6	%	16,307			8.9	%
	Occupancy and related expenses	28,197			8.1	%	21,820			8.4	%	15,207			8.3	%
General and administrative expenses		39,003			10.9	%	30,556			11.4	%	37,825			19.8	%
Depreciation expense		21,704			6.0	%	14,502			5.4	%	10,222			5.4	%
Pre-opening costs		9,603			2.7	%	9,520			3.5	%	5,430			2.8	%
Loss on disposal of property and equipment		608			0.2	%	34			—	%	17			—	%
TOTAL EXPENSES		324,997			90.6	%	240,670			89.6	%	183,839			96.5	%
OPERATING INCOME		33,813			9.4	%	27,805			10.4	%	6,753			3.5	%
Other income, net		128,123			35.7	%	1,065			0.4	%	7			—	%
Interest expense		(1,643		)	(0.5	)%	(374		)	(0.1	)%	(332		)	(0.2	)%
INCOME BEFORE INCOME TAXES		160,293			44.7	%	28,496			10.6	%	6,428			3.4	%
Income tax expense		151,409			42.2	%	6,350			2.4	%	3,304			1.7	%
NET INCOME		8,884			2.5	%	22,146			8.2	%	3,124			1.6	%
Less: net income attributable to non-controlling interests		9,204			2.6	%	9,700			3.6	%	11,900			6.2	%
NET INCOME (LOSS) ATTRIBUTABLE TO SHAKE SHACK INC.		$	(320	)	(0.1	)%	$	12,446		4.6	%	$	(8,776	)	(4.6	)%

⁽¹⁾As a percentage of Shack sales.

52 | Shake Shack Inc.

Form 10-K

Shack Sales

Shack sales represent the aggregate sales of food, beverages and Shake Shack branded merchandise at our domestic company-operated Shacks. Shack sales in any period are directly influenced by the number of operating weeks in such period, the number of open Shacks and same-Shack sales. Same-Shack sales means, for any reporting period, sales for the comparable Shack base, which we define as the number of domestic company-operated Shacks open for 24 full fiscal months or longer. Effective December 29th, 2016, we changed our methodology for calculating same-Shack sales whereby Shacks enter the comparable base at the beginning of their 25th full fiscal month, whereas previously they entered at the beginning of their 105th full fiscal week.

Shack sales were $346.4 million for fiscal 2017 compared to $259.4 million for fiscal 2016, an increase of $87.0 million or 33.6%. The growth in Shack sales was primarily driven by the opening of 26 new domestic company-operated Shacks during fiscal 2017 partially offset by a same-Shack sales decrease of 1.2%. Shacks outside of the comparable Shack base contributed $89.3 million to the this increase, partially offset by a decrease of $2.3 million related to those Shacks included in the comparable base. Same-Shack sales decreased 1.2% during fiscal 2017, primarily driven by decreased guest traffic of 3.2%, partially offset by a combined increase of 2.0% in price and sales mix. For purposes of calculating same-Shack sales growth, Shack sales for 43 Shacks were included in the comparable Shack base. For fiscal 2017 and fiscal 2016, AUVs for domestic company-operated Shacks decreased to $4.6 million in fiscal 2017 from $5.0 million in fiscal 2016, primarily due to the addition of Shacks with lower unit volumes to the system.

Shack sales were $259.4 million for fiscal 2016 compared to $183.2 million for fiscal 2015, an increase of $76.2 million or 41.6%. The growth in Shack sales was primarily driven by the opening of 20 new domestic company-operated Shacks during fiscal 2016 and same-Shack sales growth. Shacks in the comparable Shack base contributed $5.2 million of this increase while those domestic company-operated Shacks open less than a year contributed $67.3 million. Additionally, we had $3.1 million of incremental sales from our Madison Square Park Shack which was temporarily closed in the prior year for renovations. Same-Shack sales increased 4.2% during fiscal 2016, primarily driven by a combined increase of 3.1% in price and sales mix and increased guest traffic of 1.1%. For purposes of calculating same-Shack sales growth, Shack sales for 29 Shacks were included in the comparable Shack base. For fiscal 2016 and 2015 AUVs for domestic company-operated Shacks remained constant at $5.0 million.

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.

Licensing revenue was $12.4 million for fiscal 2017 compared to $9.1 million for fiscal 2016, an increase of $3.3 million or 36.1%. This increase was primarily driven by the opening of 19 licensed Shacks (net of closures) during fiscal 2017, $0.5 million of previously deferred royalty revenue recognized in connection with the initial publication of the Shake Shack book and the initial strength of our newer Shacks in South Korea, partially offset by lower revenue from Shacks in the Middle East as a result of macroeconomic and geopolitical volatile conditions.

Licensing revenue was $9.1 million for fiscal 2016 compared to $7.4 million for fiscal 2015, an increase of $1.7 million or 23.8%. This increase was primarily driven by the opening of 10 licensed Shacks (net of closures) during fiscal 2016, partially offset by lower revenue from Shacks in the Middle East and Turkey as a result of the challenging macroeconomic conditions causing declining traffic throughout the region.

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 and are subject to increases or decreases in commodity costs.

Food and paper costs were $98.3 million for fiscal 2017 compared to $73.8 million for fiscal 2016, an increase of $24.5 million or 33.3%, primarily due to the opening of 26 new domestic company-operated Shacks during fiscal 2017. As a percentage of Shack sales, food and paper costs remained constant at 28.4% in fiscal 2017 and 2016.

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Form 10-K | 53

Food and paper costs were $73.8 million for fiscal 2016 compared to $54.1 million for fiscal 2015, an increase of $19.7 million or 36.4%, primarily due to the opening of 20 new domestic company-operated Shacks during fiscal 2016. As a percentage of Shack sales, food and paper costs decreased to 28.4% for fiscal 2016 compared to 29.5% for fiscal 2015. This decrease was primarily the result of menu price increases implemented at the end of 2015, lower commodity costs, primarily in beef and dairy, and to a lesser extent, efficiencies gained through supply chain enhancements, such as the restructuring of certain of our purchasing arrangements and better geographic diversification of our suppliers. These decreases were partially offset by higher distribution costs associated with entering new markets.

Labor and Related Expenses

Labor and related expenses include domestic company-operated Shack-level hourly and management wages, bonuses, payroll taxes, workers’ compensation expense and medical benefits. As we expect with other variable expense items, we expect labor costs to grow as our Shack sales grow. Factors that influence labor costs include minimum wage and payroll tax legislation, health care costs and the performance of our domestic company-operated Shacks.

Labor and related expenses were $91.7 million for fiscal 2017 compared to $65.5 million for fiscal 2016, an increase of $26.2 million or 40.0%. This increase was primarily due to the opening of 26 new domestic company-operated Shacks during fiscal 2017. As a percentage of Shack sales, labor and related expenses increased to 26.5% in fiscal 2017 compared to 25.3% in fiscal 2016. This increase was due to: (i) the opening of 26 new domestic company-operated Shacks, which typically carry higher labor costs during the first few months of operations; (ii) increases in hourly wages that were implemented at the end of fiscal 2016; (iii) investments in our management team to support future growth; and (iv) the opening of Shacks at various volumes.

Labor and related expenses were $65.5 million for fiscal 2016 compared to $44.8 million for fiscal 2015, an increase of $20.7 million or 46.5%. This increase was primarily due to the opening of 20 new domestic company-operated Shacks during fiscal 2016. As a percentage of Shack sales, labor and related expenses increased to 25.3% in fiscal 2016 compared to 24.4% in fiscal 2015. This increase was due to a combination of factors, including: (i) the opening of 20 new domestic company-operated Shacks, which typically carry higher labor costs during the first few months of operations; (ii) the company-wide increase to the starting hourly wage that we implemented at the beginning of the year; (iii) increased staffing in preparation of our ramped up growth; and (iv) additional labor from training in anticipation of the national launch of the Shack App.

Other Operating Expenses

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

Other operating expenses were $35.8 million for fiscal 2017 compared to $24.9 million for fiscal 2016, an increase of $10.9 million or 43.5%, primarily due to the opening of 26 new domestic company-operated Shacks in fiscal 2017. As a percentage of Shack sales, other operating expenses increased to 10.3% in fiscal 2017 compared to 9.6% in fiscal 2016. This increase was primarily due to certain fixed expenses and increased facility costs as our Shacks mature, as well as the introduction of more Shacks of various volumes into the system.

Other operating expenses were $24.9 million for fiscal 2016 compared to $16.3 million for fiscal 2015, an increase of $8.6 million or 53.0%, primarily due to the opening of 20 new domestic company-operated Shacks in fiscal 2016. As a percentage of Shack sales, other operating expenses increased to 9.6% in fiscal 2016 compared to 8.9% in fiscal 2015. This increase was due to higher repair and maintenance expenses and utilities costs, as well as the introduction of a broader volume Shacks into the system.

Occupancy and Related Expenses

Occupancy and related expenses consist of Shack-level occupancy expenses (including rent, common area expenses and certain local taxes), excluding pre-opening costs, which are recorded separately.

Occupancy and related expenses were $28.2 million for fiscal 2017 compared to $21.8 million for fiscal 2016, an increase of $6.4 million or 29.2%, primarily due to the opening of 26 new domestic company-operated Shacks in fiscal 2017. As a percentage of Shack sales, occupancy and related expenses decreased to 8.1% in fiscal 2017 compared to 8.4% in fiscal 2016, primarily due to

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more favorable lease terms and the impact of additional lease financing arrangements where we are deemed to be the accounting owner.

Occupancy and related expenses were $21.8 million for fiscal 2016 compared to $15.2 million for fiscal 2015, an increase of $6.6 million or 43.5%, primarily due to the opening of 20 new domestic company-operated Shacks in fiscal 2016. As a percentage of Shack sales, occupancy and related expenses increased to 8.4% in fiscal 2016 compared to 8.3% in fiscal 2015, primarily due to the introduction of a broader range of unit volume Shacks into the system.

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.

General and administrative expenses were $39.0 million for fiscal 2017 compared to $30.6 million for fiscal 2016, an increase of $8.4 million or 27.6%. This increase was primarily driven by higher payroll expenses from increased headcount at our home office to support our growth plans, technology development costs related to our digital products, $0.7 million of costs incurred in connection with our executive transition, $0.5 million of the recognition of previously deferred costs related to the initial publication of the Shake Shack book, $0.2 million of the first phase costs associated with Project Concrete and $0.2 million of non-cash deferred rent for our new home office. As a percentage of total revenue, general and administrative expenses decreased to 10.9% in fiscal 2017 from 11.4% in fiscal 2016. This decrease was primarily due to benefit from higher Shack sales.

General and administrative expenses were $30.6 million for fiscal 2016 compared to $37.8 million for fiscal 2015, a decrease of $7.2 million or 19.2%. As a percentage of total revenue, general and administrative expenses decreased to 11.4% in fiscal 2016 from 19.8% in fiscal 2015. This decrease was primarily due to non-recurring expenses incurred in the prior year, including $12.8 million of non-recurring compensation expenses, $0.6 million of IPO-related expenses and $0.8 million of expense related to a legal settlement, partially offset by $0.9 million increase in equity-based compensation, higher consulting fees related to maintaining our complex organizational structure and increased payroll expense associated with new home office personnel hired to support future growth.

Depreciation Expense

Depreciation expense consists of the depreciation of fixed assets, including leasehold improvements and equipment.

Depreciation expense was $21.7 million for fiscal 2017 compared to $14.5 million for fiscal 2016, an increase of $7.2 million or 49.7%. This increase was due primarily to depreciation of capital expenditures related to the opening of 26 new domestic company-operated Shacks during fiscal 2017. As a percentage of total revenue, depreciation expense increased to 6.0% in fiscal 2017 from 5.4% in 2016. This increase was primarily due to incremental depreciation of property, plant and equipment related to the opening of 26 new domestic company-operated Shacks during fiscal 2017.

Depreciation expense was $14.5 million for fiscal 2016 compared to $10.2 million for fiscal 2015, an increase of $4.3 million or 41.9%. This increase was due primarily to depreciation of capital expenditures related to the opening of 20 new domestic company-operated Shacks during fiscal 2016. As a percentage of total revenue, depreciation expense remained constant at 5.4% in fiscal 2016 and 2015.

Pre-Opening Costs

Pre-opening costs consist primarily of legal fees, rent, managers’ salaries, training costs, employee payroll and related expenses, all costs to relocate and compensate Shack management teams prior to an opening and wages, travel and lodging costs for our opening training team and other support team members. All such costs incurred prior to the opening of a domestic company-operated Shack are expensed in the period in which the expense is incurred. Pre-opening costs can fluctuate significantly from period to period, based on the number and timing of domestic company-operated Shack openings and the specific pre-opening costs incurred for each domestic company-operated Shack. Additionally, domestic company-operated Shack openings in new geographic market areas will initially experience higher pre-opening costs than our established geographic market areas, such as the New York City metropolitan area, where we have greater economies of scale and incur lower travel and lodging costs for our training team.

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Pre-opening costs were $9.6 million in fiscal 2017, including $1.6 million of deferred rent expense, compared to $9.5 million in fiscal 2016, an increase of $0.1 million or 0.9%, primarily due to an increased number of openings and the timing of new domestic company-operated Shacks expected to open.

Pre-opening costs were $9.5 million in fiscal 2016, including $2.5 million of deferred rent expense, compared to $5.4 million in fiscal 2015, an increase of $4.1 million or 75.3%, primarily due to an increased number of openings and the timing of new domestic company-operated Shacks expected to open.

Loss on Disposal of Property and Equipment

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

The loss on disposal of property and equipment in fiscal 2017 was $0.6 million. The loss on disposal of property and equipment in fiscal 2016 and 2015 was not material.

Other Income, net

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

Other income, net was $128.1 million in fiscal 2017, which primarily consisted of $127.2 million of adjustments to the liabilities under our tax receivable agreement, including the impact of tax reform, and $0.8 million of dividend income related to the investments in marketable securities we acquired during fiscal 2017.

Other income, net was $1.1 million in fiscal 2016, which primarily consisted of $0.7 million adjustment to the liabilities under our tax receivable agreement and $0.3 million of dividend income related to the investments in marketable securities we acquired during fiscal 2016.

Interest Expense

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

Interest expense in fiscal 2017 was $1.6 million compared to $0.4 million fiscal 2016 and $0.3 million in fiscal 2015. These increases were primarily due to the increased number of leases where we are deemed to be the accounting owner.

Income Tax Expense

As a result of the IPO and certain organizational transactions completed in connection with our IPO, we became the sole managing member of SSE Holdings, which 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 generated by SSE Holdings.

In December 2017, the Tax Cuts and Jobs Act of 2017 (the "TCJA") was enacted into law. The TCJA provides for significant changes to the U.S. Internal Revenue Code of 1986, as amended, including the reduction of the U.S. federal corporate income tax rate from 35% to 21%, among other provisions. As a result of the TCJA, we recognized a $125.9 million benefit in other income related to the reduction in liabilities under its tax receivable agreement. We also recognized an additional $138.6 million of income tax expense as a provisional amount in accordance with Staff Accounting Bulletin No. 118 ("SAB 118"), relating to the remeasurement of our deferred tax assets.

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Income tax expense was $151.4 million in fiscal 2017 compared to $6.4 million in fiscal 2016. The increase in income tax expense is primarily driven by the aforementioned $138.6 million of additional income tax expense we recognized in connection with the remeasurement of our deferred tax assets relating to the enactment of the TCJA. To a lesser extent, the increase in income tax expense was also driven by an increase in our pre-tax income, as well as an increase in our ownership interest in SSE Holdings. As our ownership interest in SSE Holdings increases, our share of the taxable income of SSE Holdings also increases. Our weighted-average ownership interest in SSE Holdings increased to 70.6% in fiscal 2017 from 63.2% in 2016. Our effective income tax rate increased to 94.5% in fiscal 2017 from 22.3% in fiscal 2016 primarily due to the remeasurement of deferred tax assets in connection with the enactment of the TCJA.

Income tax expense was $6.4 million in fiscal 2016 compared to $3.3 million in fiscal 2015. The increase in tax expense was primarily due to the increase in pre-tax income, as well as our ownership changes in SSE Holdings. As our ownership interest in SSE Holdings increases, our share of the taxable income of SSE Holdings also increases. Our weighted-average ownership interest in SSE Holdings increased to 63.2% in fiscal 2016 from 39.0% in 2015. This increase was offset by a $1.5 million tax benefit we recognized as a result of the impact of a tax rate change on our deferred tax assets. Our effective income tax rate decreased to 22.3% in fiscal 2016 from 51.4% in fiscal 2015 primarily due to the IPO and Organizational Transactions that occurred in fiscal 2015. As the non-recurring compensation expenses and other IPO-related expenses recognized during fiscal 2015 were incurred in the period prior to the organizational transactions completed in connection with the IPO, and prior to our becoming a member of SSE Holdings, we were not entitled to any tax benefits related to those losses. We recognized tax expense in fiscal 2015 based on our allocable share of the taxable income generated in the period subsequent to becoming a member of SSE Holdings, which resulted in a very high effective tax rate in fiscal 2015 when compared to our consolidated pre-tax income.

Net Income Attributable to Non-controlling Interests

We are the sole managing member of SSE Holdings and have the sole voting power in, and control the management of, SSE Holdings. Accordingly, we consolidate the financial results of SSE Holdings and report a non-controlling interest on our Consolidated Statements of Income (Loss), representing the portion of net income attributable to the other members of SSE Holdings. The SSE Holdings LLC Agreement provides that holders of LLC Interests may, from time to time, require SSE Holdings to redeem all or a portion of their LLC Interests for newly-issued shares of Class A common stock on a one-for-one basis. In connection with any redemption or exchange, we receive a corresponding number of LLC Interests, increasing our total ownership interest in SSE Holdings. The weighted average ownership percentages for the applicable reporting periods are used to attribute net income and other comprehensive income to Shake Shack Inc. and the non-controlling interest holders.

Net income attributable to non-controlling interests was $9.2 million for fiscal 2017 compared to $9.7 million for fiscal 2016, a decrease of $0.5 million or 5.1%. This decrease was primarily driven by an increase in our weighted-average ownership interest in SSE Holdings from 63.2% in fiscal 2016 to 70.6% in fiscal 2017 as a result of redemptions of LLC Interests.

Net income attributable to non-controlling interests was $9.7 million for fiscal 2016 compared to $11.9 million for fiscal 2015, a decrease of $2.2 million or 18.5%. This decrease was primarily driven by an increase in our weighted-average ownership interest in SSE Holdings from 39.0% in fiscal 2015 to 63.2% in fiscal 2016 as a result of redemptions of LLC Interests.

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NON-GAAP FINANCIAL MEASURES

To supplement the consolidated financial statements, which are prepared and presented in accordance with U.S. generally accepted accounting principles (“GAAP”), we use the following non-GAAP financial measures: Shack-level operating profit, Shack-level operating profit margin, EBITDA, adjusted EBITDA, adjusted EBITDA margin, adjusted pro forma net income and adjusted pro forma earnings per fully exchanged and diluted share (collectively the "non-GAAP financial measures").

Shack-Level Operating Profit

Shack-level operating profit 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 employee compensation as it serves as a metric in certain of our performance-based employee 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 operating income, the most directly comparable GAAP financial measure, is as follows.

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(dollar amounts in thousands)		2017			2016			2015			2014⁽¹⁾			2013
Operating income		$	33,813		$	27,805		$	6,753		$	3,143		$	5,935
Less:
	Licensing revenue	12,422			9,125			7,373			6,488			3,869
Add:
	General and administrative expenses	39,003			30,556			37,825			18,187			12,453
	Depreciation expense	21,704			14,502			10,222			5,809			3,541
	Pre-opening costs	9,603			9,520			5,430			6,105			2,334
	Loss on disposal of property and equipment	608			34			17			105			25
Shack-level operating profit		$	92,309		$	73,292		$	52,874		$	26,861		$	20,419

Total revenue		$	358,810		$	268,475		$	190,592		$	118,530		$	82,456
Less: Licensing revenue		12,422			9,125			7,373			6,488			3,869
Shack sales		$	346,388		$	259,350		$	183,219		$	112,042		$	78,587

Shack-level operating profit margin		26.6		%	28.3		%	28.9		%	24.0		%	26.0		%


(1)	We operate on a 52/53 week fiscal year that ends on the last Wednesday of the calendar year. Fiscal 2017, 2016, 2015 and 2013 each contained 52 weeks. Fiscal 2014 was a 53-week year.

EBITDA and Adjusted EBITDA

EBITDA is defined as net income before interest expense (net of interest income), income tax expense and depreciation and amortization expense. Adjusted EBITDA is defined as EBITDA (as defined above) excluding equity-based compensation expense, deferred rent expense, losses on the disposal of property and equipment, as well as certain non-recurring items that we don't believe directly reflect our core operations and may not be indicative of our recurring business operations.

How These Measures Are Useful

When used in conjunction with GAAP financial measures, EBITDA and Adjusted EBITDA are supplemental measures of operating performance that we believe are useful measures to facilitate comparisons to historical performance and competitors' operating results. Adjusted EBITDA is a key metric used internally by our management to develop internal budgets and forecasts and also serves as a metric in our performance-based equity incentive programs and certain of our bonus arrangements. We believe presentation of EBITDA and Adjusted EBITDA provides investors with a supplemental view of our operating performance that facilitates analysis and comparisons of our ongoing business operations because they exclude items that may not be indicative of our ongoing operating performance.

Limitations of the Usefulness of These Measures

EBITDA and Adjusted EBITDA may differ from similarly titled measures used by other companies due to different methods of calculation. Presentation of EBITDA and Adjusted EBITDA is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. EBITDA and Adjusted EBITDA exclude certain normal recurring expenses. Therefore, these measures may not provide a complete understanding of our performance and should be reviewed in conjunction with our GAAP financial measures. A reconciliation of EBITDA and Adjusted EBITDA to net income, the most directly comparable GAAP measure, is as follows.

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(in thousands)	2017		2016		2015		2014⁽¹⁾		2013
Net income	$	8,884	$	22,146	$	3,124	$	2,118	$	5,423
Depreciation expense	21,704		14,502		10,222		5,809		3,541
Interest expense, net	1,565		285		325		363		52
Income tax expense