“Our best track record is in restaurants. We’ve never lost money. We’ve only made a fortune, interestingly, investing restaurants.”
There were many things that surprised me about Lex Fridman’s interview with billionaire hedge fund manager Bill Ackman, including the 3.5-hour length of the interview, but this statement about Mr. Ackman’s success with restaurant companies stood out the most.
Investing in individual restaurants is fraught with risks, but I guess some of that risk is mitigated when you are investing in a restaurant chain with a proven business model. It also helps if you get the timing of investing in a company like Chipotle Mexican Grill (CMG) right by pouncing on the opportunity during a moment of temporary weakness. This article is not about Chipotle but rather another fast-casual restaurant chain that is undergoing a CEO transition.
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Shake Shack Inc. (SHAK): $94.91
Market Cap: $4.02B
Key Insights
Rob Lynch will leave Papa John’s and take over for Randy Garutti, who has led Shake Shack for a dozen years as CEO.
Shake Shack reported same-store sales up 2.8%, and system-wide sales rose 21.4% in Q4 to $442.1 million year-over-year.
In 2024, Shake Shack expects to grow total revenue by 11% to 15% and open 80 new restaurants.
Mr. Lynch’s navigated turbulent waters at Papa John’s, stepping in after founder John Schnatter’s controversial departure.
Papa John’s saw its stock appreciate 76% during Mr. Lynch’s nearly five-year tenure at the company.
Bull case: Shake Shack’s robust financial performance, margin expansion, and strategic initiatives position it for sustained growth and profitability, especially with a focus on operational efficiency and disciplined investment.
Bear case: Shake Shack faces risks from increasing labor costs, potential challenges in effectively passing on price increases to consumers, and uncertainties surrounding geopolitical and macroeconomic pressures, particularly in key markets like the Middle East and China.
Founded in 2004, Shake Shack Inc. (SHAK) made its mark as a fast-casual restaurant chain, recognized globally for its premium burgers, hot dogs, fries, and shakes. The company went public in 2015, marking a significant milestone in its expansion. Originating from NYC’s Madison Square Park, Shake Shack has since grown its presence to over 520 locations worldwide, solidifying its position as a favorite destination for quality fast-casual dining.
Leadership Transition
On December 11, 2023, Shake Shack Inc. (SHAK) disclosed that Randy Garutti, its Chief Executive Officer, would retire in 2024 after more than two decades with the company. Following this announcement, on March 21, 2024, Shake Shack revealed that Rob Lynch would step into the role of CEO, effective May 20, 2024.
Notably, Mr. Lynch’s selection marks a significant shift for Shake Shack, as he will be the first outsider to assume the leadership role in the company’s history. Garutti, synonymous with Shake Shack’s rise from a humble hot dog cart in Madison Square Park to a global brand, will transition to an advisory role to provide support until the end of 2024.
These kinds of transitions from a long-serving CEO are generally difficult, and it is not uncommon for them to return as a “boomerang CEO” after initially handing over the reins to an outsider.
Ravi Thanawala, Papa John’s International’s current CFO since July 2023, will be assuming the interim CEO position at the pizza chain.
At first glance, Shake Shack’s latest move seems surprising. After all, they’re known for their hip, city-style burger joints, quite different from the nationwide pizza empire of Papa John’s (PZZA). But hey, sometimes unexpected choices lead to big wins, right?
Bringing on Rob Lynch, the former CEO of Papa John’s, could be just the shake-up Shake Shack needs. Mr. Lynch’s tenure at Papa John’s saw him navigating turbulent waters, stepping in after founder John Schnatter’s controversial departure.
When Lynch took the helm at Papa John’s in 2019, the company was grappling with the fallout from the Schnatter controversies as detailed in this Vice article. As a result of the reputational damage, the company experienced a notable decline in its financial performance.
However, under Lynch’s executive leadership over the subsequent five years, there were several significant milestones achieved that revitalized the brand. Concurrently, efforts were made to modernize Papa John’s and shift the brand narrative away from Schnatter’s prominent role as the face of the pizza chain. Despite pandemic challenges, Papa John’s reported 12 consecutive quarters of strong performance, positioning itself as a contender in the pizza industry.
Rob Lynch orchestrated a remarkable surge in global system-wide sales, soaring past the $5 billion mark across nearly 5,900 outlets.
With an illustrious career spanning over 25 years in the quick-service restaurant and consumer packaged goods realms, Lynch’s journey boasts stints as the President of Arby’s and the Vice President of Marketing at Taco Bell.
While these achievements certainly paint a successful picture of leadership in the food service industry, the question arises: why transition from leading a quick-service pizza chain to spearheading a fast-casual burger brand?
Despite being a larger company, Shake Shack’s stock performance has not matched that of Papa John’s.
“Rob’s appointment as CEO marks the beginning of our next chapter of growth as we seek to further elevate Shake Shack as a leading global brand,”said Danny Meyer, Shake Shack’s Founder and Chairman of the Board of Directors.
During the recent earnings call, Mr. Garutti disclosed Shake Shack’s pivot towards quick-service elements, such as combo meals and new desserts like sundaes and mini shakes. Despite this shift, Shake Shack maintains its commitment to offering a premium dining experience. Leveraging Mr. Lynch’s expertise in menu innovation from his Papa John’s tenure, Shake Shack aims to explore expanded menu options. Additionally, while expanding drive-thru locations and licensed stores, Shake Shack faces the challenge of cracking into the top ranks of limited-service burger restaurants nationwide.
Shake Shack ended last year with 518 stores worldwide, including 184 outside the U.S. The company has said it plans to open 80 more stores this year. Papa John’s has 5,900 stores worldwide, including 2,473 outside the U.S.
Compensation
Restaurant Association’s Restaurant Performance Index
TheNational Restaurant Association’s Restaurant Performance Index(RPI) is a monthly composite index that tracks the health of the U.S. restaurant industry.
The RPI is measured in relation to a neutral level of 100. Index values above 100 indicate that key industry indicators are in a period of expansion, while index values below 100 represent a period of contraction for key industry indicators. The index consists of two components: the Current Situation Index, which measures current trends in four industry indicators (same-store sales, traffic, labor and capital expenditures), and the Expectations Index, which measures restaurant operators’ six-month outlook for those four indicators.
The National Restaurant Association’s Restaurant Performance Index (RPI) stood at 99.0 in February, up 0.3% from a level of 98.7 in January.
The Current Situation Index, which measures current trends in four industry indicators, stood at 98.3 in February – up 1.8% from a level of 96.6 in January. February represented the fifth consecutive month in which the Current Situation Index stood below the 100 level in contraction territory.
Same-Store Sales and Customer Traffic
Restaurant operators reported amodest improvement in same-store sales and customer traffic from January’s soft readings, but both metrics were still down from year-ago levels. Looking forward, restaurant operators’ outlook for both sales and the economy in the months ahead remains uncertain.
Restaurant operators persisted in reporting a decline in customer traffic.
Peers
The table below provides a comparison of four Shake Shack peers. Valuation
Shake Shack shares surged to their highest point in nearly three years before experiencing a slight decline. However, even with this downturn, the company’s stock has gained almost 75% since last year.
The company has a market cap of $4.11 billion, an enterprise value of $4.34 billion, and a $478 million net debt. The forward P/E ratio is 147.26 and the company is unprofitable on a GAAP basis.
Financials
Shake Shack has been facing challenges in translating its revenue growth into corresponding net income. Despite a commendable increase in system-wide sales, particularly highlighted in the latest quarter, the company’s net income remains comparatively subdued.
Elevated expenses, including food, labor, and occupancy costs, have contributed to lower-than-expected net income margin.
Key Insights from Earnings Call
On April 1, California Assembly Bill 1228 took effect, raising the minimum wage by another 25% for fast-food employees on top of the $16 minimum wage mandate that was enacted at the beginning of the year. Fast-food chains like McDonald’s, Chipotle, Starbucks, Taco Bell, Shake Shack, El Pollo Loco, and In-N-Out Burger, which operate nearly 30,000 restaurants in California, are strategizing to mitigate rising labor costs.
CFO Katie Fogertey indicated during an earnings call that Shake Shack plans to raise menu prices this year.
Fourth Quarter 2023 Financial Results (Press Release) (Investor Presentation)
Financial Highlights for the Fiscal Year 2023:
Total revenue of $1.08 billion, up 20.8% versus 2022, includes $1.04 billion of Shack sales and $40.7 million of licensing revenue.
System-wide sales of $1.7 billion, up 23.5% versus 2022.
Operating incomeof $5.9 million.
Net incomeof $20.5 million.
Opened 41 new domestic company-operated Shacks. Opened 44 new licensed Shacks, including locations in Thailand and Bahamas.
FY2024 Targets:
Total Revenue Growth: Expected to increase by 11% – 15% year-over-year to approximately $1.21 billion – $1.25 billion.
Same-Store Sales: First-quarter and annual same-store sales are forecasted to increase in the low-single digits.
Shack-Level Operating Profit Margin: Aim to expand to 20% – 21%.
Adjusted EBITDA Growth: Targeting a growth of 21% – 29% year-over-year to $160 million – $170 million.
New Shack Openings: Plan to open approximately 80 new Shacks, comprising roughly 40 domestic company-operated and 40 licensed outlets.
System-Wide Shack Count: Anticipate ending FY2024 with nearly 600 Shacks system-wide, reflecting more than double the footprint compared to five years ago.
Conclusion
Shake Shack outlined strategic priorities to enhance guest experience, boost sales, increase profitability, optimize construction, and invest in teams. Rob Lynch’s appointment aligns with these goals, aiming to address challenges in translating revenue growth into net income.
The growth story is certainly exciting, but the rich valuation gives us some pause.
CEO
DFS: Discover Financial Services Chief Executive Officer and President Michael Rhodes resigns effective April 1, 2024.
WATT: Energous President and Chief Executive Officer Cesar Johnston resigns effective March 24, 2024.
LUNA: Luna Innovations President and Chief Executive Officer Scott Graeff retires effective March 24, 2024.
REPL: Replimune Chief Executive Officer Philip Astley-Sparke retires effective March 26, 2024.
ZURA: Zura Bio Chief Executive Officer Someit Sidhu resigns effective April 8, 2024.
NRIM: Northrim Bancorp President, Chief Executive Officer and Chief Operating Officer Joseph Schierhorn resigns effective April 6, 2024.
NEON: Neonode President and Chief Executive Officer Urban Forssell resigns effective April 10, 2024.
ANGI: Angi Chief Executive Officer Joseph Levin resigns effective April 8, 2024.
HXL: President and Chief Executive Officer Nick Stanage resigns effective May 1, 2024.
WIT: Wipro Chief Executive Officer Thierry Delaporte resigns effective April 6, 2024.
TDOC: Teladoc Health Chief Executive Officer Jason Gorevic resigns effective April 5, 2024.
ABIO: ARCA biopharma terminates President and Chief Executive Officer Michael Bristow effective April 3, 2024.
CFO
J: Jacobs Engineering Chief Financial Officer Claudia Jaramillo resigns effective March 29, 2024.
HNRG: Hallador Energy Chief Financial Officer Lawrence Martin resigns effective April 10, 2024.
MNTS: Momentus Chief Financial Officer Eric Williams resigns effective April 1, 2024.
LICY: Li-Cycle Chief Financial Officer Debbie Simpson resigns effective March 26, 2024.
SBEV: Splash Beverage Group Chief Financial Officer Stacy McLaughlin resigns effective March 29, 2024.
IPI: Intrepid Potash Chief Financial Officer Matthew Preston resigns effective April 12, 2024.
MVST: Microvast Holdings and Chief Financial Officer Craig Webster agreed that Mr. Webster would step down from his position effective April 10, 2024.
CUBI: Customers Bancorp terminates Chief Financial Officer Carla Leibold effective April 10, 2024.
ZNTL: Zentalis Pharmaceuticals Chief Financial Officer Melissa Epperly resigns effective April 5, 2024.
PRLD: Prelude Therapeutics and Chief Financial Officer Laurent Chardonnet agreed that he would step down from his position as Chief Financial Officer, effective April 8, 2024.
ZCAR: Zoomcar Chief Financial Officer Geiv Dubash resigns effective April 12, 2024.
General Counsel/Chief Legal Officer
RDW: Redwire General Counsel Nathan O’Konek resigns effective April 26, 2024.
TELO: Telomir Pharmaceuticals General Counsel Christos Nicholoudis resigns effective April 10, 2024.
Others
GDEN: Golden Entertainment Chief Operating Officer Stephen Arcana resigns.
GMDA: Gamida Cell Chief Commercial and Chief Operating Officer Michele Korfin departs effective April 1, 2024.
ZIP: ZipRecruiter Chief Operating Officer Qasim Saifee resigns effective April 30, 2024.
TRNS: Transcat terminates Chief Operating Officer Mark Doheny effective April 8, 2024.
COMM: CommScope Holding Chief Accounting Officer Laurie Oracion resigns effective April 17, 2024.
CLB: Core Laboratories Chief Accounting Officer Kevin Daniels resigns.
GTES: Gates Industrial Corporation Chief Accounting Officer David Wisniewski resigns effective April 19, 2024.
RKT: Rocket Companies Chief Accounting Officer Brian Brown resigns effective March 25, 2024.
EGY: VAALCO Energy terminates Chief Accounting Officer Jason Doornik effective April 8, 2024.
TDOC: Teladoc Health Chief Accounting Officer Richard Napolitano resigns effective May 3, 2024.
CARA: Cara Therapeutics Chief Medical Officer Joana Goncalves resigns effective April 16, 2024.
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