Shake Shack Inc. (NYSE:SHAK) has seen a wild ride since the 2015 IPO of SHAK stock. The fast casual burger chain has seen its shares fall 35% over the last 52 weeks, and trade well off of a high of $96.75 set in May of 2015.
But a new strategy to boost Shake Shack Inc. looks promising. SHAK stock plans to beef up its presence in new regions, and international growth looks promising.
Sure, the old concerns about a high P/E ratio for SHAK stock remain. However, big growth plans are a a big reason why the lofty valuation is justifiable and should reward patient shareholders.
SHAK Stock Expansion Plans
Shake Shack Inc. traces its roots to New York. And the restaurant brand has now expanded across several regions in the U.S., often focusing on large populated cities. But a new plan for SHAK stock calls for stores to open in high populated California cities, but also the Midwest and new store settings like malls instead of simply an urban focus.
The Mall of America in Minnesota boasts over 40 million visitors annually, with estimates calling for the figure to hit 60 million soon with mall expansion underway. It should come as no surprise that a Shake Shack that opened in the large mall saw long lines.
It did likely come as a surprise to see Shake Shack in a mall in the first place, however, as this represented the company’s first domestic indoor mall store. This successful opening strengthens the Shake Shack brand and the ability to open additional mall based stores in new territories.
A new store opened in West Hollywood California has proven beneficial to Shake Shack. The new SHAK location saw strong lines of an hour or more during its first week open. The strong demand led Shake Shack to boost its targets for the region. Shake Shack will open four additional stores in California quicker than expected. SHAK stock news shows locations are coming to Glendale, Hollywood, Century City, and Downtown Los Angeles in 2016 and 2017, strengthening the new focus on California expansion.
The average new Shake Shack location does $3.3 million in revenue. With strong opening in California and Arizona, Shake Shack now has pushed the expectation to $3.6 million per store. The company’s stores open for two years average $5.0 million in annual sales.
Shake Shack raised its full year guidance to 16 new locations in the U.S. for 2016 and 2017 as well. In the first quarter, three stores were opened in the U.S.
International Growth for Shake Shack Inc.
Have you ever stood in line to get lunch or dinner for more than 13 hours? That’s what Shake Shack customers did at its new location in Seoul, South Korea. More than 1500 customers waited double digit hours to get their hands on Shake Shack food.
The first SHAK unit in South Korea is part of a multi-unit deal signed with SPC Group, a large South Korean conglomerate with experience franchising food brands including Dunkin’ Brands Group, Inc. (NASDAQ:DNKN) properties Baskin Robbins and Dunkin’ Donuts. SPC Group and Shake Shack signed a deal to open 25 locations in South Korea by 2025. With the early results, Shake Shack could see an extension on that plan, or get some nibbles from other territories.
Shake Shack collects licensing revenue from international franchisees for using the brand and also collects a portion of the revenue. Recent Shake Shack international locations also opened in Saudi Arabia, Bahrain, and Oman. A second location opened in Japan during the current second fiscal quarter.
SHAK Stock Financials Surge
Shake Shack stock should be trading much higher if it can keep up the strong financial performance. Shake Shack reported an impressive first quarter, which saw revenue up 43% thanks to new stores. More impressive was the same store sales growth of 9.9%. While the quarter performance was strong, Shake Shack stock could be very volatile this year as it goes against strong same store sales figures from last year.
In fiscal 2015, Shake Shack reported quarterly same store sales growth of +11.7%, +12.9%, +17.1%, and +11.0%. Overall same store sales were up 13.3% for Shake Shack on the year. The company already reported the 9.9% growth against the first quarter gain of 11.7%. Shake Shack has guided conservatively with an estimate of same store sales growth in the 4-5% range for the full year. Shake Shack stock could see a boost if it can exceed that range. The introduction of the new chicken sandwich in January helped boost first quarter sales and could have a lasting impact for the full fiscal year.
Shake Shack stock trades around $40 a share, which is well on the low end of the company’s 52 week range ($30.00 to $75.90). Shares got a slight boost recently on rumors of buyout interest from McDonald’s Corp. (NYSE:MCD). While McDonald’s is likely not buying Shake Shack, I think Shake Shack stock looks extremely attractive right now. The unit expansion plans are a strong sign of the brand growing.
The big negative here is the high valuation Shake Shack stock trades at. With shares at $40, SHAK trades at around 100 times the $0.44 estimated in earnings per share this fiscal year. The market capitalization of $1.5 billion is also lofty given estimates of $250 million in current fiscal year sales and even on $321 million for the next fiscal year. Fast casual restaurant stocks continue to be hot on the stock market at times and also fall just as fast. The key investment thesis here is believing the brand can succeed in national expansion, which given the cult like following and lines out the door, I believe is a strong conclusion.
New territories like malls and California are boosting the average unit volume for new stores. International stores are adding to the value of the brand and company.
Buy SHAK stock now and be pleasantly rewarded down the road. You don’t even have to wait in line for 13 hours like people do in South Korea to get Shake Shack food.
As of this writing, Chris Katje did not own a position in any of the stocks named here.
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