E Shake Shack: Impressive Expansion But Profit Concerns Weigh

Shake Shack (SHAK) is an casual restaurant chain based in New York City featuring designer shakes, burgers, and other quick-style food. As an investment, it has traded at a premium valuation for some time, and is currently in the middle of a 52-week range:

(Click on image to enlarge)

Source: Yahoo Finance

What we like about the name is that it has expanded its menu to attract new customers. It has really turned into a tiny operation, which began as a simple food cart inside Madison Square Park in 2004, and as its popularity steadily grew, moved into physical locations. The growth is looking impressive over the next five years.

Shake Shack is a growth/expansion play. Management is actually targeting 450 domestic company-owned locations, up from the just over 90 It has now. With these restaurants, it is targeting $700 million in revenue, up from just $359 million in 2017. The question is, can you buy the stock here? Or are you simply chasing revenues at the expense of other metrics?

Revenue growth continues to Shake Shack because it is continuously expanding. In the most recent quarter, revenues were higher on the back of new stores being opened, but did not get much help from same store sales. Same store sales were positive, and we were looking for -0.5% to 0.5% growth on this metric. Same store sales came in at 0.8% for quarter. This is down substantially versus 1.5% growth in the fourth quarter last year. This is the most important indicator that we look for.

It is tough to justify getting behind a new growth name when same store sales are this weak. Some will argue that the growth of the company offsets this issue. Others will argue that these comps are tough to gauge given the little time new shops have been open. Still, we maintain that declining comparable sales are due to a combination of lower weekly sales volumes per stores, in addition to flat traffic. That is a problem, regardless of the new shops being opened. While this was partially offset by higher prices and better sales mix, this is very disappointing. Keep an eye on this metric going forward.

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Gary Anderson 8 months ago Contributor's comment

Shake Shack is popular, trendy, with quality. But I can't get over the limp, non caramelized hamburger buns. I can pay half price to get a caramelized bun at In&Out.

Quad 7 Capital 8 months ago Author's comment

Good point Gary. Never had them personally, maybe if they expand will get the chance.