A new stock popped up on my screener recently called Shake Shack (SHAK). It is a chain of upscale burger restaurants, with operations in 26 US states and several foreign countries. As of March 2019, they operated 218 stores.
The company is expecting revenues of 580 million for 2019, which represents 26% growth YoY. That's down from Q1 growth rate of 33% and slightly down from 27% achieved in 2018. Despite that, Shake shack still has lot of potential for future growth. the company is targeting 450 domestically owned stores, which is almost 4x the current amount.
After several quarters, same store sales finally ticked up to 3.6%, comprised of 1.6% traffic increase and 2% price increase. While the company is growing pretty fast, the same store sales numbers are still pretty weak.
In Q1, the company opened five domestic company-operated Shacks and seven licensed Shacks. They are expanding this year to China, Singapore, Mexico and Philippines,
The company is expecting revenues of 580 million for 2019, which represents 26% growth YoY. That's down from Q1 growth rate of 33% and slightly down from 27% achieved in 2018. Despite that, Shake shack still has lot of potential for future growth. the company is targeting 450 domestically owned stores, which is almost 4x the current amount.
After several quarters, same store sales finally ticked up to 3.6%, comprised of 1.6% traffic increase and 2% price increase. While the company is growing pretty fast, the same store sales numbers are still pretty weak.
In Q1, the company opened five domestic company-operated Shacks and seven licensed Shacks. They are expanding this year to China, Singapore, Mexico and Philippines,
Source: Investor presentation
The company has grown a lot over the past few years, but mainly thanks to opening new stores, not same store sales (same-Shack sales). SSS grew by 4.1% in 2014 and 13.3% in 2015, but decelerated to a growth of 1% in 2018. Average weekly sales are down from $89k to $84k. Average unit volumes, which are basically unit sales were down to $4.4 million in 2018 from $4.6 million in 2014. International sales per unit have also gone down to $3.05 mil. from $4.6 mil. in 2014.
Source: 10-K report
Now this might be quite understandable, as their first Shacks were in New York City, which have very high sales per sqm, and as the company expands to more and cheaper locations, the sales per unit will naturally trend down. The decline in international licensed Shacks is a bit alarming though, as it also shows that the concept is not selling as well abroad as in US. Shake Shack has gone from 84 stores in 2015 (44 domestic company-operated) to 208 stores (124 company-operated) and 218 stores as of the end of March 2019.
Source: Investor presentation
The company was founded by Dan Meyer, an entrepreneur who owns several upscale restaurants in New York City. Here are a few articles about him:
https://fortune.com/2019/04/06/danny-meyer-tipping-shake-shack/
https://www.forbes.com/sites/briansolomon/2015/05/20/as-shake-shack-reopens-flagship-danny-meyer-becomes-600-million-man/#5df4894b5ccb
https://www.forbes.com/sites/lorenfeldman/2018/01/14/danny-meyer-on-eliminating-tipping-it-takes-a-year-to-get-the-math-right/#3f1df421431f
Dan Meyer is known for several controversial moves such as eliminating tipping (instead they incorporated it into menu prices) and going completely cash-less in several of his restaurants. Shake Shack was originally a single hot dog and burger stand at Madison Square Garden but thanks to its popularity quickly expanded to other locations and cities.
Financials
Shake Shack recognizes revenue from its own stores and licensing fees
Operating and gross margin
Balance sheet items
Summary
I have looked at Shake Shack before when it was in low 40s, but didn't buy it back then. Now the stock price is 70% higher. I don't mind the valuation that much, as the multiples are a bit elevated but still reasonable given their large potential. What I mind is that SSS are growing so slowly, and also that it's a restaurant business, which is not something I'm an expert at. I don't understand their competitive advantage, it might be taste, but to it seems like that there are so many competitive options available that I just don't see their edge.
https://fortune.com/2019/04/06/danny-meyer-tipping-shake-shack/
https://www.forbes.com/sites/briansolomon/2015/05/20/as-shake-shack-reopens-flagship-danny-meyer-becomes-600-million-man/#5df4894b5ccb
https://www.forbes.com/sites/lorenfeldman/2018/01/14/danny-meyer-on-eliminating-tipping-it-takes-a-year-to-get-the-math-right/#3f1df421431f
Dan Meyer is known for several controversial moves such as eliminating tipping (instead they incorporated it into menu prices) and going completely cash-less in several of his restaurants. Shake Shack was originally a single hot dog and burger stand at Madison Square Garden but thanks to its popularity quickly expanded to other locations and cities.
Financials
Shake Shack recognizes revenue from its own stores and licensing fees
Operating and gross margin
Balance sheet items
Summary
I have looked at Shake Shack before when it was in low 40s, but didn't buy it back then. Now the stock price is 70% higher. I don't mind the valuation that much, as the multiples are a bit elevated but still reasonable given their large potential. What I mind is that SSS are growing so slowly, and also that it's a restaurant business, which is not something I'm an expert at. I don't understand their competitive advantage, it might be taste, but to it seems like that there are so many competitive options available that I just don't see their edge.
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