Calling the Paycheck Protection Program “extremely confusing,” and citing access to additional capital “others do not,” Shake Shack decided to immediately return the entirety of its $10 million loan it received April 10 from the SBA. CEO Randy Garutti and Danny Meyer, founder and chairman, and current chief executive of Union Square Hospitality Group, penned a LinkedIn letter Sunday saying they’re giving back the money “so that those restaurants who need it most can get it now.”
Like many chains and publicly traded corporations, Shake Shack was receiving its fair share of backlash from critics of the PPA displeased with how funds were distributed before the program ran out of money (a deal to add $450 million is reportedly in the works).
Local D.C. bakery DC Sweet Potato Cake, which was denied a loan, told CNN Business, “What are we doing this for? Why are we in business just to be told we're not good enough because we're not big enough?"
Kura Sushi ($6 million), Ruth’s Chris ($20 million), and J. Alexander’s ($15.1 million) are among the public chains that disclosed SBA funding. Potbelly ($10 million) and Fiesta Restaurant Group ($10 million) were approved as well, along with Shake Shack.
As of April 16, the SBA checkmarked more than 1.66 million loans totaling $342.2 billion, according to the agency. The SBA said 4,412 were for $5 million and above, but 74 percent, or 1,228,893, were for $150,000 and less. The overall average loan size was $206,000, and the 5 million and above category mixed 9.03 percent of the total money amount, despite only being 0.27 percent of the loan count.
MORE ON THE STIMULUS PACKAGE’S SETBACKS
“Accommodation and food services,” made up 161,876 approved loans at $30.5 billion, or 8.91 percent of the total amount given out. That was the fifth most, falling behind construction ($44.9 billion), professional, scientific, and technical services ($43.294 billion), manufacturing ($40.92 billion), and health care and social assistance ($39.89 billion).
Meyer and Garutti said the historic $2.2 trillion CARES Act was initially met with “a big sigh of relief.”
“This pandemic, and the consequential shut-down of an entire industry that relies upon the gathering of people—at a moment when people cannot gather—had already shown that no restaurant is unsinkable. With slim margins in our industry to begin with, restaurants of all sizes and flavors were vulnerable and laying off people by the hundreds,” they wrote.
Shake Shack revealed Friday that it furloughed or laid off more than 1,000 employees across its operations and home office. And HQ employees, as well as Shake Shack’s executive teams, took reduced pay for “an infinite period.”
The brand added, however, that it was committed to providing full pay for general managers during the crisis, regardless of whether their store remains open or not, in addition to paying out PTO, and covering 100 percent of medical benefits through July for all furloughed managers and home office employees.
In tandem, Shake Shack announced an “at-the-market” equity program in which it can offer and sell up to $75 million in shares to strengthen cash flow as it battles COVID-19 setbacks, which have been severe for the social-driven brand.
On April 17, the company then disclosed transactions resulting in aggregate $150 million gross proceeds of new equity capital. Shake Shack raised roughly $140 million gross proceeds from the sale of shares of its Class A common stock in an underwritten offering, and about $10 million from shares pursuant to the “at-the-market” program mentioned before.
Shake Shack said it would use the net proceeds “for general corporate purposes,” and to further enhance its ability to resume a long-term strategic growth plan when COVID-19 disruption passes.
Garutti and Meyer said the stimulus bill “arrived just in the nick of time,” for restaurants struggling across the country. Or at least it appeared to.
They said the PPP came with no user manual and left business trying to figure out how, when, or even if to apply.
Shake Shack has 189 domestic restaurants and nearly 8,000 employees. Union Square Hospitality has more than 2,000.
Garutti and Meyer arrived at the same conclusion scores of restaurants have—apply now and hope things become clearer later. They said that seemed ‘the best chance of keeping our teams working, off the unemployment line, and hiring back our furloughed and laid off employees …”
“While the program was touted as relief for small businesses, we also learned it stipulated that any restaurant business—including restaurant chains—with no more than 500 employees per location would be eligible. We cheered that news, as it signaled that Congress had gotten the message that as both as an employer, and for the indispensable role we play in communities, restaurants needed to survive,” they wrote. “There was no fine print, anywhere, that suggested: ‘Apply now, or we will run out of money by the time you finally get in line.’”
Shake Shack employs roughly 45 people per restaurant, meaning it fell well under the provision that individual locations employ fewer than 500 workers per store. On the surface, not knowing money would run out and smaller restaurants would be cut from consideration, there wasn’t much to dissuade Shake Shack from applying to “protect as many of our employees’ jobs as possible,” the letter wrote.
The immediate drop in business due to stay-at-home mandates and other social distancing efforts has led Shake Shack to face operating losses of more than $1.5 million each week. The fast casual’s same-store sales dropped 28.5 percent in March compared to last year, but with much of the bulk coming in the back half of the month. Shake Shack said on April 2 that sales at U.S. locations were down between 50–90 percent, with the average sitting at 70 percent.
As of April 17, Shake Shack temporarily closed 17 units and swung an operating loss of about $800,000 in the first quarter. On the licensed side, 57 of the company’s 120 stores are open. All locations within the U.K., Turkey, and Japan have closed. As have domestic stadium venues. U.S. airport locations have also either fully shuttered or significantly slowed as air travel diminished to a near standstill, the company said.
For Meyer’s 20-plus unit Union Square Hospitality Group, all restaurants closed March 13 and the company laid off more than 2,000 employees, or 80 percent of its staff. Meyer said at the time that was more than all the people his company had hired in the first 20 to 25 years of business.
Meyer and Garutti said USHG’s decision whether or not to apply was more complicated given the stipulation PPP loans are only forgiven if employees are hired back by June. A major criticism has concerned the timeline, with restaurants saying they need an extension to rehire workers given nobody is certain when dining rooms will be reopened and, importantly, when business will return to some semblance of normal. If it ever will. The Independent Restaurant Coalition asked officials to extend the maximum loan amount to three months after restaurants can legally reopen to full capacity, reinstate a $500 million gross revenue cap, and increase the length of time restaurant owners have to repay their loans to 10 years from two years.
Meyer and Garutti said, considering most USHG restaurants are in New York City, “that timeline is unlikely achievable for full-service restaurants.” So, the conversation relied upon the company’s conviction that it could one day pay back the loan. And thus it decided to apply, “taking on the risk in order to hire back laid off employees as soon as possible.” The letter said some loans were funded.
But everything changed when funding for the PPP was exhausted.
“If this act were written for small businesses, how is it possible that so many independent restaurants whose employees needed just as much help were unable to receive funding? We now know that the first phase of the PPP was underfunded, and many who need it most, haven’t gotten any assistance,” Garutti and Meyer said.
Shake Shack’s ability Friday to access additional capital will ensure its long-term stability, they added. And, in turn, it made the call to return the $10 million PPP loan.
Garutti and Meyer laid out some provisions they hope will be added in the (hopeful) next wave of funding. This is in their words:
Fund it adequately. It’s inexcusable to leave restaurants out because no one told them to get in line by the time the funding dried up. That unfairly pits restaurants against restaurants. This industry rises and falls together. And if there is a concern that once again the government will have not allocated adequate funding, then send business to the front of the PPP line which has more limited access to outside funding.
Assign to each applying restaurant a local bank that will be responsible for executing the loan assuming the restaurant has satisfied eligibility requirements. Too many restaurants have been left out of the program simply because they lacked a pre-existing banking or loan relationship.
Eliminate the arbitrary June forgiveness date for PPP loans. This virus has moved in waves with a different timeline in different parts of our country. Instead, make all PPP loans forgivable if an adequate number of employees are rehired by a minimum 6 months following the date that a restaurant’s state (or city) has permitted a full reopening to the public.
“With adequate funding and some necessary tweaks, the PPP program can provide the economic spark the entire industry needs to get back in business,” the letter continued. “Shake Shack, like all restaurant businesses in America, is doing the best we can to navigate these challenging times. We don’t know what the future holds. Our people would benefit from a $10 million PPP loan but we’re fortunate to now have access to capital that others do not. Until every restaurant that needs it has had the same opportunity to receive assistance, we’re returning ours."