Shake Shack: Shaking Up the Status Quo in Casual Dining

March 8 2015

Shake Shack (NYSE: SHAK), a fast casual restaurant specializing in hamburgers, hot dogs, crinkle-cut french fries, frozen custard, milkshakes, beer and wine, is one of the most intriguing recent additions to our Consumer sector coverage. Founded in New York City in 2004 by restaurateur Danny Meyer, the restaurant chain is a part of the Union Square Hospitality Group (USHG), which focuses on strengthening communities through hospitality, excellent food, and the use of high quality ingredients. Consensus estimates call for revenue of $161 million in 2015, up from $117 million in 2014, and EPS of $0.05 in 2015, as compared to $0.06 in 2014.

Shake Shack debuted on the New York Stock Exchange on January 30, 2015, in a five million share IPO priced at $21.00 per share. The underwriters fully exercised their over-allotment of 750,000 shares. All proceeds of roughly $100 million from the offering went to Shake Shack. J.P. Morgan and Morgan Stanley were the lead book-running managers for the transaction, with Barclays Capital, Goldman Sachs, and Jefferies as book-running managers, and William Blair, and Stifel acting as co-managers for the offering. The stock’s current price is roughly $43 per share, and its market cap is about $500 million.

Shake Shack hails from humble roots, as it started out as a food cart in New York City in 2001, when founder Danny Meyer looked to improve Madison Square Park. Meyer helped create the Madison Square Park Conservancy to redevelop the park, and his director of operations Randy Garutti (now Shake Shack’s CEO) established the Shake Shack food cart. After three years of remarkable success, Shake Shack applied for an opening from New York’s Department of Parks and Recreation to establish a kiosk style restaurant to help fund the future of Madison Square Park.

Shake Shack ultimately won the rights to create this restaurant and thus opened the first Shake Shack in Madison Square Park in 2004. As a result of its immense popularity, a rekindled interest in ground beef, and the ambition of its owners, Shake Shack has branched out to over 60 locations, including Atlanta, Baltimore, Boston, Chicago, Las Vegas, Washington DC and Philadelphia, as well as abroad in Dubai, Abu Dhabi, London, Moscow, Beirut, Doha, Kuwait City, and Istanbul.

Shake Shack is attempting to create its own sector and become the first-ever self-described “fine casual” restaurant, combining the ease, accessibility and cost of fast casual restaurants with high quality ingredients, food preparation, and warmth of fine dining. Shake Shack is more expensive and upscale than other restaurants in this mold. The average two person meal at Shake Shack is approximately $30.00, significantly higher than other fast casual burger restaurants. In turn, this relatively high price makes for a more upscale feel and sophisticated crowd.

Shake Shack is also viewed as a “cult” restaurant, meaning that it is not exactly mainstream, but only those that are a “member of the club” know about the restaurant. Another difference that Shake Shack boasts is that it is not yet an enormous brand. Unlike its competitors, upon opening, each Shake Shack location aims to be the “community-gathering place”. Shake Shack is also environmentally friendly, and has a mission to “Stand For Something Good” in all things and aspects of not only its business, but also as people. Shake Shack inspires all of its customers and employees to take this approach to everything they do.

To see how Shake Shack screens against a comparable group of over 40 Internet IPOs of the last seven years, please contact Battle Road Research.