Will Shake Shack's IPO serve tasty returns?
Shake Shack didn't rush into the potential initial public offering it announced today.
The New York-based company, which is looking to raise around $100 million in the IPO, started out in 2001 as a hot dog cart operating in New York City's Madison Square Park. According to the company's S-1 filing with the Securities & Exchange Commission, the cart, which served hamburgers, hot dogs, frozen custard, beer and wine, "was an instant hit, with lines forming daily throughout the summer months for the next three years." As a result, the New York City Department of Parks & Recreation allowed Shake Shack to set up a kiosk.
About five years later, the company opened a second location to alleviate the long lines at the park, not knowing that it would lead to the chain that today has 63 locations.
"At just about the time we decided to grow Shake Shack, the Great Recession hit," wrote founder Danny Meyer and Chief Executive Randy Garutti in a letter to shareholders included in the SEC filing. "Intriguingly, there were some advantages for us. First, our value allowed guests to trade down in price without giving up one ounce of flavor-or even prestige. We were selling wines and really good beer at fair prices -- so you could get away with using Shake Shack as a date place and have money left over relative to going out to a full service restaurant."
This represented a change for Meyer, a well-known restaurateur best known for stand-alone fine dining establishments such as Central Park's Tavern on the Green. The strategy, though, was successful. During the 39-week period ended Sept. 24, 2014, the New York-based company reported $3.54 million in net income on revenue of $83.8 million versus $4.4 million in profit and $59.5 million in sales during the year-earlier period. According to Bloomberg, Shake Shack is hoping to attract a market valuation of $1 billion.
"They seem to have good unit economics," said Mary Chapman, senior analyst with Technomic, a which researches restaurant industry trends, in an interview. They have a line around the building at lunchtime. No, I am not surprised that they are profitable."
Chapman attributes Shake Shack's success to its "tight menu" focusing on burgers, hot dogs, shakes and French fries instead of offering other items such as salads. McDonald's (MCD) has come under fire from investors and franchisees for its bloated menu, which it's currently in the process of trimming as part of an attempt to jump-start moribund U.S. sales.
"They are not trying to please everyone," Chapman said of Shake Shack.
The chain is growing. During fiscal 2013, it added 10 new locations and is continuing to add new restaurants in existing markets such as New York, Boston and South Florida while entering new ones such as Austin, Texas. Shake Shack also is expanding outside the U.S. and has 20 stores in the Middle East along with others in the U.K., Russia and Turkey.
Given that Technomic estimates the size of the burger market at $72 billion, Shake Shack sees plenty of growth opportunities. The company plans to open at least 10 new domestic stores annually beginning in 2015 for the foreseeable future and eventually hopes to have 450 stores, although it won't give a timetable for that.
Shake Shack and fast casual and better burger chains such as El Pollo Loco (LOCO) and Zoe's Kitchen (ZOES), which have also gone public this year are pressuring fast-food chains such as McDonald's.