Industry Sales
Eating and drinking places registered total sales of $88.1 billion on a seasonally adjusted basis in April, according to preliminary data from the BLS. That was up 0.6% from a level of $87.6 billion in March, though it remained well below January’s recent high of $89.3 billion. Restaurants continued to regain a larger share of consumers’ wallets in April, as total spending in non-restaurant retail sectors rose 0.4%. April represented the 14th time in the last 15 months that restaurant sales growth outpaced gains in overall retail sales. While total dollar spending in restaurants trended higher in recent months, much of that growth was due to rising menu prices. With the exception of January’s strong performance, real eating and drinking place sales remained relatively flat for much of the past year. After adjusting for menu price increases, April’s eating and drinking place sales volume was just 0.7% above the April 2022 level. In nominal terms, eating and drinking place sales were up 9.4% during the 12-month period.
SHAK Black Book
We are hosting a SHAK Black Book on June 6th @ 10 AM
I have been saying for years that SHAK's aggressive growth strategy would not end well for the company. Just like in 2017/2018, when CMG's food-born illness problems exposed severe operational issues with the company, the pandemic exposed severe weaknesses in the SHAK operating model as the company has yet to recover. We view an Engaged activist position on the stock as confirmation of severe problems at the company. Trading at 522x NTM EPS and 24x EV/NTM EBITDA that is not reflected in the stock. By the numbers, here are how bad SHAK's financial performance has been under the current CEO:
- From 2017-2019 sales grew 66%, and EBIT (-5%)
- Between 2019-2022 sales grew another 50%, and EBIT went from $41 million in 2019 and (-$9.4M) in 2022
- From 2017-2022 the store base grew 3x and EBIT went from $41MM to (-$9.0M)
And current estimates suggest it's not going to get any better:
- The Pandemic exposed serious issues in the SHAK operating model
- In 2023/2024, street estimates are for 41% revenue growth and EBIT to go from (-$9.0m) to $10M or 0.8% EBIT margin and 76% below pre-pandemic profitability
Most restaurant companies' profitability levels are above pre-pandemic profitability, and SHAK is not; the definition of an ineffective CEO (and he was compensated $20 million over the last five years) and he still has a job. Engaged Capital has now settlement with the company making minor changes and let the company off the hook by hiring a consultant does not fix the problem. The stock is up 30% post-earnings and 70% YTD on what? We are confident that Engaged Capital has done excellent work on SHAK and exposed severe issues. Our Black Book will outlines some of the company's issues the company faces and what it will take to double EBITDA from $123 million in 2022. Given how the company has grown over the past ten years, there are likely inefficiencies in the following areas:
- Poor site selection – This is likely where the company has the most problems and cannot adapt to a new growth model. The many different types of sites contributing to system inefficiencies.
- Lack of Drive-thru - a pandemic exposed weakness
- Advertising – the company lacks penetration and awareness in many markets due to unit density.
- Supply chain – most companies like SHAK, with ineffective management, fail to upgrade the supply chain.
- Digital – The pandemic exposed the lack of investment in digital technologies.
- Labor inefficiencies - stemming from all of the above
