Company Overview: Shake Shack, Inc. (NYSE: SHAK) is a modern-day "roadside" burger stand that serves quality burgers, chicken sandwiches, hot dogs, crinkle-cut fries, shakes, frozen custard, beer, and wine from the classic American menu. As of June 30, 2021, the company had 339 shacks operating globally, of which 200 were domestic company-operated, 23 were domestic licensed, and 116 were foreign licensed. SHAK makes money by selling food, beverages, and branded items at domestic locations and by charging licensing, opening, and territory fees for licensed shacks.

SHAK Details

Key Takeaways from Q2FY21 (ended June 30, 2021)

• Growth in Revenues: In Q2FY21, the company's total revenue amounted to USD 187.46 million, representing a robust 104.24% increase year-over-year from USD 91.79 million, resulting primarily from the sustained momentum associated with the recovery from the pandemic.
• Increase in Same-Shack Sales: In Q2FY21, Same-Shack sales (sales for the comparable Shack base, defined by the number of domestic company-operated shacks open for at least 24 months) grew 52.7% year-over-year, owing to increased guest incoming relating to in-Shack dining.
• Significant Improvement in EBITDA: SHAK's Adjusted EBITDA for Q2FY21 improved to USD 20.65 million in Q2FY21 vs. USD (8.83) million in Q2FY20, representing an EBITDA margin of 11.0%.
• Increase in Net Income: The net income for Q2FY21 was USD 2.07 million vs. a loss of USD 18.03 million reported in Q2FY20, with diluted earnings per share (EPS) amounting to USD 0.05.

Revenues & Gross Profit Key Highlights; Analysis by Kalkine Group

Recent Developments

• On July 21, 2021, SHAK stated that over the next 12 months, it would invest more than USD 10 million in its restaurant employees. This amount would increase wages, provide signing and retention bonuses, offer equity grants to managers, and conduct leadership development programs.
• On June 22, 2021, SHAK and its licensee Maxim's Caterers Limited, one of Asia's largest food and beverage firms, announced an extended collaboration to establish ten new shacks in additional regions in China by 2031, including Sichuan, Chongqing, Yunnan, Hubei, Shaanxi, Anhui, Henan, and Guizhou.
• On June 09, 2021, the company announced the appointment of Katherine (Katie) Fogertey as its Chief Financial Officer (CFO), effective June 14, 2021. Katie has relevant experience of over 15 years and will be in charge of SHAK's financial operations.

Other Key Findings in Q2FY21

• The firm added eight new domestic shacks, one new domestic licensed shack, and nine new global licensed shacks during Q2FY21. It also reported that no shacks were permanently closed during the period.
• In Q2FY21, average weekly sales reached USD 72,000, the highest since the COVID-19 pandemic began.
• Despite the shift in the mix with the resumption of in-Shack eating, digital sales retention was about 80% in June 2021, compared to January 2021, when digital sales were at their peak.
• New buyers in the company-owned app and online channels during Q2FY21 increased 16.7% from the previous quarter, with 2.8 million total new purchaser additions since mid-March 2020.

Balance Sheet & Liquidity Position

• Significant Improvement in Cash Balance: The company exited Q2FY21 with a cash balance (including marketable securities) of USD 420.21 million, 128.67% more than USD 183.76 million at the end of FY20.
• Cashflow from Operations: Operating cash inflow in H1FY21 was USD 37.01 million vs. USD 17.99 million in H1FY20, primarily due to an increase in net income and the impact of non-cash charges.
• Increase in Debt: SHAK's total outstanding debt amounted to USD 249.69 million at Q2FY21 end, higher than the reported total debt (comprising only finance leases) of USD 5.58 million as of December 30, 2020.

Key Metrics: SHAK's EBITDA and operating margins rose considerably in Q2FY21, to 9.8% and 1.8%, respectively, compared to -12.5% and -26.2% in Q2FY20. As of June 30, 2021, it had a Debt/Equity Ratio of 0.60x, compared to the industry median of 1.03x.

Profitability Profile; Analysis by Kalkine Group  

Top 10 Shareholders: The top 10 shareholders together form around 64.0% of the total shareholding, while the top 4 constitute the maximum holding. BlackRock Institutional Trust Co., N.A., and Fred Alger Management, LLC, hold the maximum stake in the company at 14.55% and 11.62%, respectively, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis:

• Supplier Concentration: In FY20, SHAK purchased some of its ingredients such as chicken breasts, potato buns, Shroom Burgers, 44% of its ground beef patties, and 78% of its ShackSauce from one supplier each, with most of its other vital ingredients also sourced from a limited number of vendors. As a result, any breach of contract by these vendors could harm the company's operations.
• Geographic Concentration: SHAK's financial performance is heavily reliant on its shacks located in the Northeast and the New York City metropolitan region, which account for around 40% of its total domestic company-operated shacks (as of December 31, 2020).
• Strict Adherence to the Quality of the Ingredients: Food products that fulfil SHAK's strict criteria must be delivered regularly. Any limitations in the supply of food items caused by manufacturing or distribution issues, bad weather, or other factors might harm the quality, and cost of ingredients, adversely impacting its operating and profit margins.
• Stiff Competition: The company operates in the highly competitive restaurant industry, competing with various well-placed companies in terms of brand name, price, food quality, service, design and location.

Outlook:

• Looking forward, SHAK expects to open 35 – 38 domestic operating and 20 – 25 licensed shacks in FY21, with plans to expand its geographic footprint in China.
• It also expects its FY21 general and administrative expenses to range between USD 86 – 88 million and pre-opening costs of USD 13 – 14 million.
• On a short-term basis, SHAK anticipates generating revenues in the range of USD 194 – 200 million in Q3FY21, with shack sales of USD 188 – 193 million and licensing revenues of USD 6 – 7 million.
• Same-Shack sales in the coming quarter are estimated to witness % growth in mid to high twenties year-over-year, with shack level operating profit margin ranging from 15 – 17%.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Source: 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. 

Stock Recommendation: Over the past six months, SHAK corrected ~29.36%. The stock is currently trading below the mid-point of its 52-week range of USD 63.49 to USD 138.38. We have valued the stock using the EV/Sales multiple-based illustrative relative valuation method and arrived at a target price with an upside of high teens (in percentage terms). We believe that the company can trade at a slight discount to its peer's average, considering the dependence of few suppliers, geographic concentration and intense competition. We have taken peers like The Wendy's Company (NASDAQ: WEN) and Papa John's International, Inc. (NASDAQ: PZZA). Considering the significant increase in top and bottom-line performance, strategic expansion plans, improvement in average weekly sales, encouraging outlook, and current valuation, we give a "Buy" recommendation on the stock at the closing price of USD 79.66, down ~2.45% as of September 29, 2021.

SHAK Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors' appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined

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Resistance: A level where-in the stock prices tend to find resistance when they are rising, and the uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavorable movement in the stock prices.

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