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Mrinalini Chaudhuri
Mrinalini Chaudhuri
Articles (517) 

Shake Shack: Taste Remains Intact

Company reports strong 1st quarter and is poised to grow

June 27, 2016 | About:

Shake Shack (NYSE:SHAK) is a modern-day “roadside” burger stand serving a classic American menu of premium burgers, hot dogs, crinkle-cut fries, shakes, frozen custard, beer and wine. With its fresh and simple, high-quality food at a great value, Shake Shack is a fun and lively community-gathering place with widespread appeal.

The 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 domestic menu includes a variety of signature items, such as the ShackBurger, SmokeShack, Shack cago Dog, 'Shroom Burger, seasonal frozen custard, hand-spun shakes, concretes, ShackMeister Ale and Shack Red and Shack White wines. The Shake Shack concept and core menu items have not materially changed since 2004, which speaks to the timeless and universal appeal of its food offerings.

The company embraces a fine-dining heritage and is committed to sourcing premium, sustainable ingredients, such as all-natural, hormone- and antibiotic-free beef, chicken and bacon while offering excellent value to the guests. The 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, it collaborates with award-winning chefs, talented bakers, farmers and artisanal purveyors who work in different and engaging ways.

The company posted a strong first quarter and opened three domestic company-operated Shacks including first Shack in California in the heart of West Hollywood, which has been one of the strongest openings in its 12-year history. It increased the guidance for revenue for the year.

(Source: Company’s website)

First-quarter results

Total revenue during the quarter increased by 43.3% and was $54.2 million in the first quarter of 2016, which was $37.8 million in the prior-year quarter.

Shack sales for the first quarter were $52.2 million, which marked an increase of 44.7% from $36.0 million in the prior-year quarter.

Licensing revenue for the first quarter was $2.0 million, which marked an increase of 14.3% from $1.8 million in the prior-year quarter.

Same-Shack sales increased by 9.9% during the first quarter of 2016 (11.7% growth in prior-year quarter).

Average weekly sales for domestic company-operated Shacks were $90,000 for the first quarter of 2016 (a 1.1% increase from $89,000 during the prior-year quarter).

Shack-level operating profit, a non-GAAP measure, increased by 58.6% and was $14.7 million for the first quarter of 2016 ($9.3 million in the prior-year quarter).

General and administrative expenses decreased to $6.9 million for the first quarter ($18.4 million in the prior-year quarter).

As a percentage of total revenue, general and administrative expenses decreased to 12.7% for the first quarter (48.6% in the prior-year quarter).

Adjusted EBITDA, a non-GAAP measure, increased by 54.4% and was $10.8 million. As a percent of total revenue, adjusted EBITDA margins increased approximately by 140 basis points and were 19.9% (18.5% during the prior-year quarter).

Net income was $1.5 million, or 7 cents per diluted share, for the first quarter, which was a net loss of $12.7 million, or $1.06 per diluted share, during the prior-year quarter.

Adjusted pro forma net income, a non-GAAP measure, increased by 114.4% and was $2.8 million, or 8 cents per fully exchanged and diluted share during the first quarter, which was $1.3 million, or 4 cents per diluted share during the prior-year quarter.

Strong attributes of the quarter

  • The company continued to execute on its growth strategy.
  • It made crucial investments.
  • Robust traffic growth.
  • The recent launch of the Chick’n Shack at all domestic company-operated locations has driven traffic growth.
  • During the quarter, the company opened three domestic company-operated Shacks, including two Shacks in Arizona — in Scottsdale at the Fashion Square shopping center and in Phoenix in the iconic Uptown Plaza — as well as the company's first Shack in California, located in West Hollywood on Santa Monica Boulevard.

Expectations for 2016

 

Range

Total revenue

To be between $245 million and $249 million

Same-Shack sales growth

To be between 4% and 5%

Total new domestic company Shacks to be opened in 2016

16

Adjusted pro forma effective tax rate

To be between 40% and 41%

Plans

  • The company plans to expand in existing markets (New York, Boston, Philadelphia, Washington, D.C., Atlanta, Chicago, Las Vegas, Texas and South Florida) in order to leverage operational effectiveness as it clusters in these high-density markets.
  • The company plans to enter Los Angeles and Phoenix this year.

Growth strategies

  • Growing same-Shack sales.
  • Capitalizing on brand awareness.
  • Opportunistically increasing Licensed Shacks.
  • Expansion into new markets.

On a concluding note

The fast food industry currently is booming as GenX prefers to eat out mostly. Eating out has become a habit among young adults. Strong volume and operating success is key to the success of this company. It has tremendous growth potential. Adding this company to an investor's portfolio is going to create shareholder returns.

Disclosure: I do not hold any position in the company.

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