Shake Shack Inc. (SHAK, $82.77):
“Stale
Shack”
By:
Luca Cardamone, AIM student at Marquette University
Disclosure:
The AIM Equity Fund does not currently holds this position, but is considering the position. This article was written by
myself, and it expresses my own opinions. I am not receiving compensation for
it and I have no business relationship with any company whose stock is
mentioned in this article.
Summary
• Shake Shack Inc. (NYSE: SHAK) is a casual fast-food chain
that offers non-GMO products such as all-natural hamburgers, hot dogs, custards,
craft beer, and wine. The New York based company operates through more than 200
stores that are strategically located in food courts, airports and urban areas.
The company is expanding domestically and internationally through company owned
(~58%) and company licensed Shacks.
• On August 2019, the
company entered an integrated partnership with Grub Hub (a food order and delivery
website) in order to promote growth from delivery and improve digital presence.
• After positive results
in Hong Kong and Shanghai, Shake Shack agreed with Maxim's Caterers and decided
to expand in China. The company plans on opening 15 stores in Beijing over 10
years, beginning in late 2020.
• The company recently
launched an innovation kitchen that elaborates new recipes to attract and
please customers. The innovation kitchen creates and tests possible new menu
items and LTO (limited time offers).
• Food and paper costs in
the quarter were 29% of Shack sales, an increase of 90 basis points over the prior
year.
Key
points:
Shake Shack is one of the many fast-casual restaurants,
a concept that is quickly gaining popularity. Despite SHAK being in this sector,
management is not focusing in improving its menu and product quality. Even if
it’s true that the company offers non-GMO items and hormone an antibiotic-free
beef the company is not keeping up with the leading peers that are offering
more variegated healthy alternatives such as lower calorie food, reduced sugar,
and reduced sodium options. This could be a potential area to improve that will
help the company to gain success over the others as one of the main company’s
struggles is to capitalize on food.
On the other hand, the
company is focusing its growth on technology, innovation, and global expansion.
As of now, the company has 245 stores, over 16 different countries with mainland
China being the main target for the expansion after the success in Hong Kong
and Shanghai. SHAK is focusing on technology as demonstrated by the “project
concrete”. This project involves electronic kiosks that are going to substitute
the regular cashiers to achieve faster ordering and processing. After a fully
automated and cash-free store was tested in New York and resulted in customer
backlash, the company decided to opt for a combination of kiosks and cashier
stores so that customers can be educated during this technologization.
The company has invested
in an innovation kitchen that is creating new dishes to attract new customers
and keep engaged the old ones. Depending on the response to the new item SHAK
decides whether keeping the new dish in the menu or promote it as an LTO
(limited time offer). Chick’n Bites is an example of an item that management
decided to keep on the menu due to high consumer requests. However, this
product is negatively affecting the company in terms of profitability as SHAK
is incurring higher food and paper costs. Costs are driven higher also from
higher packaging costs due to increasing deliveries due to the recent
partnership with Grub Hub.
Since October 2018, the
company ESG rating has been lowered from 'A' to 'BBB'. The downgrade is mainly
due to the recognition that the management efficiency is average and similar to
its peers.
What
has the stock done lately?
SHAK was incorporated into
the AIM small cap equity fund on December 2nd, 2016. The stock was
purchased at a price of $35.75 and since then it increased to $82.77 with a
possible profit of 131.52%. After a progressive increase over time reaching an all-time
high of $105.84 in September 2019, the stock started falling due to decreasing margins
and free cash flow. Over the last month, the stock sank ~11%.
Past
Year Performance:
Since last year, SHAK has increased ~79% in value. Sales increased by 31.32% and
net income rose by 18.81%. However net margin fell by 9.63% along with
operating profit margin that was down 2.7% over the year due to higher costs
for food and expansion. The store number increased by 17.79% while average
sales per store decreased by 35%. Due to the company incurring greater
marketing expenses, and labor inflation, operating and labor expenses rose as
well respectively by, 40 and 90 basis points.
Source:
FactSet
My
Takeaway
SHAK has been a great
stock to hold for the AIM small cap fund however, it is time to capitalize on the
gain. The company is in a very sensitive period as expansion and rising costs
are driving the company’s margins lower affecting the stock price. The different
risks connected to the company are not worth holding the stock longer. SHAK is in
a phase in which results are lacking and the fact that most of the management
is selling the stock is not an auspicious sign. Indeed, it should be a clear hint
and confirmation that it’s time for the AIM small cap fund to get out of the
long position.
Source:
FactSet
