I wish Shake Shack (SHAK) would be taken private.
The company's sizzling IPO last year was done with good intentions. According to a source, one of the main reasons behind the IPO was because CEO and super restaurant ops guy Randy Garutti wanted to give employees newfound wealth in the form of stock options. I am sure there were other monetary considerations in play (such as red-hot appetite by Wall Street for new restaurant concepts), but I truly believe the IPO had good motives at its heart.
But where has that exposure to boring-as-hell stock analysts and nit-picky Wall Street gotten Shake Shack? It's just been one big lesson in dealing with the ever-changing moods of Wall Street and a stock price that has sunk 43% in the past year due to fears of slowing growth (which have consistently proven rather false in each quarter as a public company).
Here is the bottom line on Shake Shack: it remains THE next-generation McDonald's (MCD).
I don't expect it to grow to the same size globally, but I do think it will grow at least double the 500-store projection the company shared in its prospectus. Moreover, I think the market is undervaluing how global the brand could become and how it's being managed very correctly piece by piece. I may be wrong for a while on Shake Shack's stock as Wall Street works to get over its disbelief. But if I was allowed to own stock (I am not as an employee of TheStreet) Shake Shack would be a core holding that I would set aside and basically forget about. The caveats being if we get rampant Fed-driven inflation over the next 10 years that sends beef prices and employee wages spiraling out of control or new restaurant openings in the U.S. are met with muted enthusiasm (I haven't seen that happen at one single location).
A few things to consider:
New openings are being very well received. The company's new store in California is seeing average wait times of an hour over a month since it initially opened. New stores in Phoenix are rocking. Shake Shack is showing you there is an appetite for its concept and that it could successfully open new locations.
The company is seeing strong sales, despite higher prices. The company issued another menu price increase in January. Yet, same-store sales rose 9.9% in the first quarter. I don't think the people visiting Shake Shack are paying attention to how much they are shelling out. They are showing up for the impressive fast food and general experience. Not a bad position for a business to be in. And you know something? While Macy's (M) and Nordstrom (JWN) complain of weak sales due to the volatility of the U.S. dollar (hurts sales in their tourist stores), Shake Shack's restaurants, also in many tourist spots, are doing quite well. I think that is pretty telling.
Earnings are surging despite higher hourly wages. There is no Wal-Mart Syndrome happening at Shake Shack (earnings crushed because of hourly wage hikes). Shake Shack recently lifted hourly wages to more than $10 across its restaurants ¿- the company is paying well above rivals. As a result of the higher wages, the company's research shows employees are happier and are performing at a higher level (a level that was already impressive relative to competitors). Any company in a competitive industry that could take care of their employees and make a ton of money while doing so (ahem, Starbucks (SBUX)) is OK in my books.
Chicken will be a platform. Shake Shack's launch of chicken nationwide in January was a key driver of same-store sales in the quarter. On a call with analysts, the company hinted strongly that chicken would be a platform ¿ in other words, expect a menu of multiple chicken sandwiches over the course of the next 12-18 months. It was important to see chicken well received as it paves the way for another growth avenue, one full of limited-time, higher-priced sandwiches.
Breakfast is likely within the next two years. Shake Shack has not mentioned breakfast much to me when we have talked. It also hasn't mentioned it much, if at all, on earnings calls (mostly because analysts ask boring questions to help fill out their spreadsheets). But I think Shake Shack is poised to shake up breakfast within the next two years. The company does sell a very limited number of basic breakfast items in certain locations. But if you think about it, there isn't a fast food company out there serving super-high-quality fast food breakfast (looked at another way, Shake Shack has a chance to do for egg sandwiches what it's doing in hamburgers, hot dogs and likely, chicken). AndI think those breakfast items will be available all day. Sorry, McDonald's.
Like I said, core holding here people.