The fast food industry is dead. Long live the fast food industry. McDonald’s, BK, Wendy’s, and other chains are being crushed by the new generation of fast casual. Panera, Chipotle, and to a lesser extent, Shake Shack.
Shake Shack has 63 locations and a $2.4 billion market cap. The stock is up over 200% since it's IPO at $21 and has garnered a lot of investor attention.
By comparison, Panera Bread (PNRA, Financial) has 1,750+ and a $5 billion market cap and the largest and most popular fast casual restaurant, Chipotle (CMG, Financial) has a market cap close to $20 billion.
From a business (or brand) standpoint, it’s awesome. Shake Shack has one of the most raving fan bases, driving $1.88 million in sales per store every year. The shakes are delicious. The burgers are the best in my town - DC (by far). The staff is competent. And, the bathrooms are always clean.
From a numbers standpoint, Shake Shack is a shack compared with CMG or PNRA. The 63 stores produced $118 million in revenue last year and a $2.12 net profit and the company projects sales to be in the $150 million to $160 million range this year. While it does have an aggressive plan to expand to 500 stores, what would that mean to investors based on even the most aggressive model.
63 stores gives SHAK $2.1 million in net income. 500 stores would be around $17 million in net income. If they got to the same level as Chipotle, under its current operating model, it would be pulling in $50 million in net income, just a fraction of CMG’s $445 million annually.
The gross margins of SHAK aren’t horrible at 29%. That’s better than CMG’s 27%, but its depreciation and SG&A costs are double Chipotle’s. Maybe the company can create cost efficiencies over time to drive them down to CMG type levels, but right now investors are paying for the potential to do that - not the realization.
Over time, if it could do just that, the stock would be worth owning here at $63. 500 shacks at $1.88 million in sales getting a Chipotle type profit margin would put the net in the $100 million range or $3 per share. Then, at the current industry multiple (which may be too high) of 30, you get a $90 price.
Should you pay 30x for a company’s future earnings?? I don’t think so. I think a key trait in future pacing a company’s worth comes down to paying less and less (in terms of earnings) as the company grows.
Don’t get sucked into the hype on this one at this price.
