CALL DETAILS:
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Shake Shack (SHAK) Short Thesis:
- Incentivized To Grow Just Not Profitably: The CEO and CFO are entitled to receive short-term performance-based cash bonuses to satisfy Company's two objectives. 50% by hitting total quarterly revenue vs. budget and 50% by hitting quarter adjusted EBITDA vs. budget. Adjusted EBITDA is a made-up number and can be easily manipulated to meet any threshold. The two executives can get paid if the Company opens new stores and adjust numbers to meet their needs. Between 2013 and 2022 SHAK has invested $687 million in capital spending generating $62 million in cumulative EBIT or a 9% return over 9 years.
- Low Margin Company; Profitability Is Elusive: Over the past nine years, the company’s EBIT margin has averaged 3.6%. Over the last three years, the company has lost money at the EBIT level, and its margin should remain in the low single digits for the next five years. The best year from a profitability standpoint was 2016 when the company had a restaurant-level margin of 28% (now in 2022 17%) and an EBIT margin of 10% (now in 2022 -2.2%). In the same year, it generated $28MM in EBIT and earned $0.53 in EPS. In 2022 EBIT will be a loss of $18MM and EPS of ($0.32).
- Struggling To Recover From The Pandemic: The trends in the restaurant industry are very bearish. Inflation is wreaking havoc on consumer spending, margins are under pressure, and SHAK can afford continued pressure. Unfortunately, we are in the early stages of a slowdown in industry sales. While Juley may have seen a reprieve from lower gas prices, we see sales slower further into the fall. SHAK and its heavy urban concentration have muted its pandemic recovery, worsening the potential downturn.
