I love a good origin story, and Shake Shack Inc (NYSE:SHAK) has a great one. Founded by Danny Meyer as a hot dog stand outside Manhattan’s Madison Square Park in 2001, it has since evolved into the modern version of the old roadside hamburger restaurant.
It features all you’d expect from a burger joint — burgers, chicken, hot dogs, fries, drinks and even alcohol in some locations — but with a heavy focus on health. Regardless of the meat you buy, it’s guaranteed that what you’re eating is hormone and antibiotic free with premium ingredients. In a society that is trying to become healthier, SHAK is on the ball.
In fact, the company just debuted its new veggie burger — the Veggie Shack, a house-made veggie burger that blends black beans, brown rice and roasted beets and is topped with provolone cheese, lettuce, onions, pickles and vegan mustard and mayo — on April 19 in select locations. This is a big deal, as for a while the only vegetarian option was the ‘Shroom Burger. The Veggie Shack isn’t going to replace it but will instead give people a lighter veggie option.
As delicious as it sounds, this isn’t the only reason why I like SHAK right now. The company’s investment in quality food, employees and technology has led to significant growth in recent years. The number of Shacks has increased dramatically, going from 40 at the end of 2013 to 159 at the end of 2017.
The company has grown far beyond the NYC market — which still has 36 Shacks — and is now located in 20 states and D.C., as well as 11 different countries. Out of the 159 stores, 90 are owned by SHAK and operate domestically, ten are domestic and operate under a license agreement and the remaining 59 are foreign.
The explosive growth will continue this year, with SHAK expected to add 32-35 new domestically owned and operated stores from the current base of 90. It will also add another 16-18 licensed stores to its current base of 69. With the new store openings helping to offset expected flat same-store sales, management is projecting a 25% gain in revenues to $444-$448 million for 2018.
Higher wages will continue to pressure store level margins, which are expected to decline from 26.6% to 24.5%-25.5%. Higher pre-opening costs as SHAK picks up the pace of store openings will also weigh on results, so analysts are looking for full-year EPS to decline from 57 cents a year ago to 47 cents. However, I believe CEO Randy Garutti is being a little conservative with his projections and will not be surprised if SHAK ultimately does better than his current outlook for 2018.
Huge Market Potential for SHAK Stock
In any event, investors are not interested in SHAK for what it will do this year, but what it is capable of down the road. This is a very small company with a $1.6 billion market cap, but it has the potential to be huge. By 2020, management expects to have 200 domestically owned and operated locations and 120 global stores operated under a license agreement, so they essentially want to double their store base from the end of 2017.
The key to this expansion will be continued customer acceptance of the Shake Shack concept, and given the company’s strong track record odds are high that management will meet their 2020 revenue goal of $700 million, which equates to EPS of 80 cents or higher. Even then, SHAK will still be a relatively small company, so it has extensive room for additional growth.
Ultimately, I believe the company will be successful thanks to its better quality food and positive dining experiences at lower prices.
Hilary Kramer is the editor of GameChangers, Breakout Stocks, High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.