About Shake Shack
I’m sort of a momma’s boy, don’t judge.
Whenever I can spend some time with my mom I’m greatly inclined to do so as when we are both together, we can effortlessly make any situation one filled with laughter and joy and suffice it to say memories are made.
With that, one of the things I enjoy doing most with my mom is taking drives in and around town, shooting the breeze and driving wherever the road takes us, whether it is making my way towards my university’s sprawling campus near downtown or its heading due south and cutting through neighborhood after neighborhood, each one distinctly different than the other, talking about life in general and our respective futures.
Sometimes you just have to be present.
At any rate, one day one of our rides took us up north towards one of the premier shopping centers in the region and we subsequently did some window shopping, walking through Dick’s Sporting Goods, near Macy’s and a few other retail establishments to just take in the sites and some of the displayed merchandise.
Prior to making our way back, I had at some point or another heard of a casual dining establishment, Shake Shack, and figured it would be a cool idea to check out the restaurant nearby and the food since there isn’t another location near my humble abode.
We walked into the store, conveniently placed an order through an automated kiosk, waited a few minutes (probably around seven minutes in total) and got our food, which, for those who aren’t as familiar with Shake Shack, was pretty much regular fast-food but ever so slightly elevated (the prices were, anyways).
Think burgers, fries, fries slathered with cheese and bacon, shakes (well obviously) and a few other menu items that seemingly appeal greatly to the masses.
For those interested in knowing how the food was, I personally enjoyed my bacon and cheese brushed fries and the root beer float I partook in, however, for the price we paid it wasn’t all that worth it and I would’ve much rather been fine with paying much less for some bacon and cheese infused fries at a cheaper casual dining venue such as Wendy’s.
But Shake Shack is one of those restaurants that prides itself on the experience one has, whereas it can be said that older, more seasoned and established fast-food companies such as Wendy’s and McDonald’s are a bit less focused on the in-person, live on location dining experience and more so on efficiency, which certainly isn’t a bad thing, especially for a consumer such as myself that is more interested in getting quality food quickly, not necessarily in reveling in some deep or thought provoking experience before eating.
However, Shake Shack is relatively new on the block and millennials really, really like this brand, which, being that this generation and the generations that follow (hopefully) have long lives ahead of them, can be viewed as a long-term tailwind for this company.
After all, millennials have proven themselves to be experience seekers.
Nevertheless, this company’s menu is a little expensive given the portions one receives, at least, from my experience, however, it can be noted that many of the Shake Shack’s in my neck of the woods (Austin, Texas) are planted down in more affluent neighborhoods and subdivisions, which clearly seems like a strategic move on part of the company and its executives.
This is far from a bad thing from a strict business perspective as many who live in said areas are much less price sensitive, boding well for Shake Shack during cycles of both boom and bust.
Setting our experience and observations about Shake Shack to the side, let’s transition into analyzing and discussing this company and its core financials and other metrics and ratios that will help us decipher whether or not its stock (NYSE: SHAK) is worth considering as an investment for years and decades to come.
Shake Shack’s stock financials
In getting this party started (as if it wasn’t started already), Shake Shack currently has a market capitalization of $2.97 billion along with a share price of $70.24 as well as a price-to-earnings (P/E) ratio that is not currently displayed and no annually distributed dividend offered to its shareholders either.
Are we surprised? Far from it, really.
Specifically, this company operates in an industry that isn’t known at all for having high, attractive margins, unless you are the absolute cream of the crop (i.e., McDonald’s, Restaurant Brands International) and even then there are costs upon costs upon, yep, costs that like Shake Shack’s diners, take large bites into the company’s profit margins, adding to the multitude of headaches that are just commonplace at this point within the dining and food industry overall.
Therefore, it makes complete and utter sense that Shake Shack doesn’t have an annual dividend on its shareholder’s menu quite yet since it would be smart to retain and reinvest every single penny it can right back into its current locations as well as developing new locations across the globe and also investing in technologies that can optimize its operations overall in the long run.
It is our opinion that this sort of progress and continued expansion, however, will take some time, which is just simply something a current and/or prospective shareholder in this company will have to deal with for probably years (if not decades) to come.
With respect to the company’s balance sheet, Shake Shack’s executive team is tasked with taking care of managing around $1.5 billion in terms of total assets along with $1.1 billion in terms of total liabilities.
Again, this is hardly surprising to us as the dining industry is just flat out known for being liability and debt-filled given all of the expenses that are incurred in just operating one single store (one of the largest being real estate), let alone hundreds of physical unit locations that Shake Shack owns and runs today.
Shake Shack is also still growing at a rather considerable rate and with great unit growth almost always follows incremental debt accrual, which can be viewed and used as a positive if this deployment of debt doesn’t get out of control.
This being the case, we are grateful that this company has managed to tame its total liabilities and keep its total assets on the higher side of things and we surely hope that this company’s management team continues to keep tabs on this and keep debt levels manageable, slowly but steadily chipping away at its outstanding debt(s) so as to not become overleveraged.
On the basis of the company’s income statement, Shake Shack’s total annual revenues (referencing since 2018) have been growing for the most part, experiencing a brief plateau between 2019 and 2020, which was to be reasonably expected given the state of the industry and the world at the time due to the initial shock and progression of COVID-19.
At any rate, this company’s total revenue in 2018 was reported as $459 million and it has led all the way up to its latest reported figure of $900 million, as reported in 2022, which is more than likely a direct result of the company putting out more units across the United States and overseas as well, implying that its menu travels well, which is a positive.
Onto the company’s cash flow statement, Shake Shack’s net income following 2019 has been reported negative, dropping to somewhere in the neighborhood of -$45.5 million in 2020 (again, COVID-19), -$10.1 million as reported the following year and nearly -$26 million as reported in 2022.
At the end of the day, this is hardly an insurmountable amount of cash bleed given the aforementioned information regarding the shape of the company’s balance sheet and its revenues, however, it is also worth mentioning that during that same timeframe Shake Shack’s total cash from operations were resoundingly positive, indicating that this company is fairly good at churning out cash, which also indicates that its margins can’t be all that bad, especially given its pricing that I experienced firsthand while dining at one of their locations, however, at least on a trailing twelve month (TTM) basis, it will probably still be muted given its current growth rate and trajectory.
Let’s find out.
Shake Shack’s stock fundamentals
Well, we were right with this one, for better or for worse, as Shake Shack’s TTM net profit margin (as displayed on TD Ameritrade’s platform) is -0.78% to the industry’s listed average of 10.83%.
Nevertheless, as long as Shake Shack continues growing (responsibly, that is, not becoming overleveraged in the process and still remaining total asset-heavy or at least not become severely mired in its aggregate liabilities to the point of no return) its national and overseas presence and growing its sales organically, we think it might be worth being patient with this company on the TTM net profit margin front, as for a specialty fast-food chain such as this one it has a lot of standards to uphold with respect to its food and its processes, thus as operations continue to become streamlined and the playbook continues working, we think it is likely that this company’s TTM net profit margin is going to slowly drift higher over the next few years.
Regarding the company’s TTM returns on assets and investment(s), also according to the figures displayed on TD Ameritrade’s platform, Shake Shack’s returns in these arenas are subpar, to say the least, however, rapid expansion can definitely hamper these returns in the short run and we wouldn’t be surprised to find that the company becomes far more competitive prior to the arrival of 2024.
As a sort of reference, however, the company’s current TTM return on investment sits at -0.58% to the industry’s listed average of 13.52%.
Should you buy Shake Shack stock?
There will be a time to seriously ponder an investment in this company’s stock (NYSE: SHAK) but we don’t personally believe now is that time.
With its shares trading at historically elevated the levels combined with the current recession and the potential deepening thereof, we think the storm is certainly going to arrive before the calm and thus, like most consumer discretionary companies, Shake Shack’s stock isn’t going to see its best days in the next year or two, at least.
We could be wrong and we can live with that, however, facts and intuition lead us in forming our opinions for now.
Even though this is the case, Shake Shack is already a very well known brand among the younger generations and it has developed a great niche in operating many (if not most) of its locations in less price resistant areas and regions of the world.
Its balance sheet is in fine shape, its revenues continue to grow, its total cash from operations happen to be in excellent condition and its primary margins and return metrics have some work to do, however, in due time we think this company will be one that many will regret not getting in on.
In factoring in all of this information, we think it is best to give this company’s stock a “hold” rating.
DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.