SHAK Activist DECK
Next Wednesday at 2PM we will hosting a SHAK activist black book going thru our understand of the current set up for the company and why we are short.
On May 15, it was revealed that activist fund Engaged sent a letter to the Shake Shack board about its request for directors and other changes to the operating model in March Engaged believes it has ways to double the hamburger chain's profitability within two years and wanted the company to get rid of its staggered board. The company immediately responded to the WSJ, "We are executing our strategic plan and making substantial operational and financial progress; we are well positioned to continue enhancing value for shareholders." Many people, including myself, believe that the company was in a solid position to defend itself in a proxy fight, given the current 1Q23 trends and outlook. A few days later, SHAK confirmed that it entered a cooperation agreement with Engaged Capital. As part of the cooperation agreement, SHAK appointed Jeffrey Lawrence to its board as an independent director; Lawrence is the CFO of ShiftKey. The company also said it would work with Engaged Capital to identify an additional mutually agreed upon the independent director to appoint to the Shake Shack Board with restaurant operations experience. The company said it also agreed to take other actions that both the company and Engaged Capital believe are in the best interests of shareholders. As part of the cooperation agreement, Shake Shack has also agreed to retain a consulting firm to support its ongoing operational initiatives to improve restaurant execution, cost structure, and profitability, and Danny Meyer and certain of his affiliates have agreed to step down their director designation rights over time. For its part, Engaged Capital has agreed to abide by certain customary standstill and voting commitments in connection with the agreement. It will support the board's full slate of directors at the annual meeting. The SHAK CEO said, "We are executing our strategic plan and share Engaged Capital's view that Shake Shack can drive additional profit growth."
Why did the company cave so quickly to engaged? We agree with Engaged that SHAK is poorly run (it has been for years). There might be an upside to profitability, but structural impediments to those potential improvements exist. We believe the CEO and his compensation structure are the biggest impediments to a significant improvement in profitability and that hiring a consultant will not solve the company's problems.
We will have more detail over the weekend.
Industry Traffic
For the week ended June 5th industry traffic improves slightly compared to how May ended. Casual Dining for that week was down (-4.54%) versus (-5.68%) for the month of May. Quick Service was down (-3.95%) for the week compared to (-5.11%) for the month of May
CAVA Valuation
CAVA closed last night with a fully diluted EV of $4.6B based on the 114.1M shares outstanding to give it a higher market cap that than WEN, SHAK, PZZA, CBRL, and JACK. We would like to see the company mature as a public company before having a more formal opinion. That said relative to others in the Fast Casual space the valuation is very rich!
