Can This Burger Joint “Shake” Off Inflation?

Unless you’ve been living under a rock, you’ve noticed the prices of food skyrocket at the grocery store and restaurants. 

Shake Shack (SHAK) raised its menu prices 2–10%, not as much as some, but noticeable nonetheless.

The general rise in financial pros’ searches for the stock was also noticeable.

Over the last two months, average daily pageviews steadily rose from five to 15 in our proprietary Trackstar database.

Despite the difficult macro environment, Shake Shack:

• Grew sales 17.4% in Q3
• Is on pace to have record revenues
• Boosted licensing revenue 20.1% in Q3

But it has negative earnings, and shares are down more than 39% YTD.

Is the interest in the stock merited?

Shake Shack’s Business

Shake Shack owns, operates, and licenses Shake Shack restaurants in the U.S. and internationally. 

Legendary restaurateur Danny Meyer founded the company. Meyer has launched and operated several other successful restaurants, including Union Square Cafe, Gramercy Tavern, Blue Smoke, and Jazz Standard. 

Shake Shack is a modern-day “roadside” burger restaurant that offers burgers, hot dogs, crinkle-cut fries, shakes, frozen custard, chicken sandwiches, beer, and wine. 

The company boasts over 400 locations, including 260 in 32 states and the District of Columbia, over 140 international locations across London, Hong Kong, Shanghai, Singapore, Mexico City, Istanbul, Dubai, Tokyo, Seoul, and more.

Currently, there are 35 Shacks under construction. 

In addition, the company has a strong digital business, which accounted for 36% of its Q3 sales.

SHAK has 177 licensed restaurants globally. In Q3, over 80% of its licensing sales were in foreign currencies. 

Source: Shake Shack

The company is looking for new ways to drum up sales. For example, it’s testing out drive-thrus in some locations.    

Financials

Source: Stock Analysis 

SHAK increased its sales for the first nine months of 2022 compared to the same period in 2021, going from $536.6 million to $661.9 million. 

The pandemic hit the company hard. Operating income dropped to a loss of $43.88 million in 2020. That improved in 2021 to an operating income loss of $15.85 million. Over the last 12 months, SHAK’s operating income has lost $25 million. 

Inflation and new location openings hit the company’s bottom line, as new restaurants take several months to reach full operating efficiency. 

But the company does have a positive operating cash flow of $69 million. And it’s financially stable with a current ratio of 2.5x. 

One advantage SHAK has over other fast-food spots is its above-average exposure to high-income consumers. 

While that’s helpful in this macro environment, the business is still trying to work through staffing issues to become fully optimal. 

Despite these challenges, Shake Shack is on pace for the highest-grossing revenues in company history. 

Valuation

Source: Seeking Alpha

SHAK is relatively expensive compared to other fast-food restaurants. The company isn’t profitable and therefore has no P/E GAAP ratio, whereas McDonald’s trades at a P/E GAAP of 33.5x, Wingstop (WING) 109.4x, Wendy’s (WEN) 26.8x, and Domino’s (DPZ) 28.8x.

On the other hand, SHAK’s price-to-sales ratio of 2.2x is stronger than MCD at 8.4x, WING at 14.1x, WEN at 3.0x, and DPZ at 2.8x.

While recent sales trends are encouraging for SHAK, it expects high single-digit blended food and paper inflation to persist in Q4 and inflation to remain elevated into 2023.  

The company did increase its menu prices to try to combat the higher costs. 

Profitability

Source: Seeking Alpha

Higher food costs and inflation have hurt Shake Shack’s business this year, along with not being able to fully staff some locations. While sales and revenues are increasing, SHAK needs to overcome these challenges to reach profitability. 

It has a net income margin of -2.67%, significantly lower than MCD at 25.4%, WING at 13%, WEN at 11.5%, and DPZ at 10%. 

SHAK has an EBIT margin of -2.89%, far worse than its fast-food peers. MCD is at 43.7%, WING 24.1%, WEN 19.9%, and DPZ 16.5%. 

Growth

Source: Seeking Alpha

SHAK has grown revenues 24.6% YoY, a much higher rate than MCD at 3.2%, WING at 18.6%, WEN at 7.6%, and DPZ at 2.69%. 

Shake Shack continues to show strength in its digital business, adding new menu offerings and locations. 

Our Opinion 5/10

SHAK has some challenges that are out of its hands, mainly inflation and staffing issues. While it’s raised prices to try to combat those issues, they’re not going away over the next few quarters. 

The long-term prospects of the business remain strong, though. SHAK currently trades above $45. We’d buy near $30 or so.

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