Shake Shack, Inc.

SHAK Details

Shake Shack, Inc. (NYSE: SHAK) is a modern-day "roadside" burger stand that serves burgers, chicken sandwiches, hot dogs, crinkle-cut fries, shakes, frozen custard, beer, and wine on a traditional American menu. The firm established five new domestic company-operated Shacks and eight new licensed Shacks in Q3FY21 (ended September 29, 2021).

Latest News:

• Collaboration with FreedomPay: On November 03, 2021, SHAK announced a strategic agreement with FreedomPay, a commerce platform that transforms existing payment systems, enabling Next Level Commerce solutions to be implemented in over 200 sites across the United States. As part of this collab, the company has already begun rolling out FreedomPay's Touchless Commerce solution.

9MFY21 Results:

• Expansion in Revenues: Due to people returning to offices, events, commuting, and tourism-based destinations, the company's total revenue increased 46.88% YoY during 9MFY21 (ended September 29, 2021) to USD 536.64 million from USD 365.36 million during 9MFY20 (ended September 23, 2020).
• Significant Improvement in EBITDA: SHAK reported an increase in EBITDA to USD 34.18 million during 9MFY21 vs. USD 4.91 million during 9MFY20.
• Surge in Net Income: The net income during 9MFY21 was USD 0.24 million vs. a loss of USD 25.22 million reported during 9MFY20.
• Boost in Weekly Sales: In Q3FY21, average weekly sales reached USD 72.0 thousand, the highest level since the COVID-19 pandemic began, and up from USD 64.0 thousand in Q1FY21.

Key Risks:

• Supplier Concentration: SHAK's supplies, including chicken breast, potato buns, Shroom Burgers, 44% of its ground beef patties, and 78% of its ShackSauce, came from one supplier each in FY20. As a result, any breach of contract by these critical vendors might harm the company's operations and finances.
• Geographic Concentration: As of FY20, SHAK's financial success is primarily due to its shacks in the Northeast and the New York City metropolitan area, which account for nearly 40% of its total domestic company-operated shacks. As a result, any adverse economic conditions in any of these locations might negatively impact the company's overall performance.

Outlook:

• Q4FY21 Estimates: SHAK indicated in its Q3FY21 press release that it expects total revenues of USD 193.5 – 200 million in Q4FY21, with shack sales of USD 187 – 193 million and license income of USD 6.5 – 7 million. Same-Shack sales growth is estimated to be in the mid to high teens (compared to Q4FY20), with a shack level operating profit margin of 14 – 16%.
• FY21 Estimates: In FY21, the company plans to set up 35 – 38 domestic operating shacks and 25 licensed ones. It also forecasts overall general & administrative (G&A) spending to be in the region of USD 86 – 88 million, with pre-opening costs of USD 13 – 14 million.

Valuation Methodology: Price/Sales Per Share Multiple Based Relative Valuation

(Analysis by Kalkine Group)

* % Premium/(Discount) is based on our assessment of the company's NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

SHAK Daily Technical Chart (Source: REFINITIV)

Stock Recommendation:

SHAK's share price has surged 43.13% in the past week and is currently trading below the mid-point of the 52-week range of USD 68.23 to USD 138.38. The stock is currently trading above its 50 and 200 DMA levels, and its RSI Index is at 75.47, indicating an overbought zone. We have valued the stock using the Price/Sales-based relative valuation methodology and arrived at a target price of USD 90.28.

Considering the significant uptick in the stock price in a short span and other technical indicators, we believe the decent business fundamentals are adequately reflected at the current trading levels. Hence, we recommend a "Sell" rating on the stock at the current price of USD 99.00, up 26.79% as of November 05, 2021, 10:44 AM ET.

* The reference data in this report has been partly sourced from REFINITIV.

* All forecasted figures and industry information have been taken from REFINITIV.

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