Shake Shack: A Solid Performance Outlook For The Business

Investment Overview - Shake Shack Inc. (NYSE: SHAK) is rated as a buy due to a solid growth outlook, with expectations of mid-teen percentage growth over the next two years, supported by strong same-store sales and new store openings [1] - Projected adjusted EBITDA is approximately $250 million by FY26, driven by an expanding adjusted EBITDA margin [1][8] Business Description - Shake Shack operates a fast food business selling burgers, fries, and milkshakes, utilizing both self-operated and licensed store models [2] - As of 2Q24, the company has 317 self-operated units and 247 franchised units, with total revenue reported at$316 million, reflecting a 16.4% year-over-year growth [2] - Restaurant level margins (RLM) improved to 22%, with a consolidated EBIT margin of 4.2%, marking significant margin expansions compared to previous quarters [2] Growth Performance - In 2Q24, Shake Shack achieved same-store sales growth (SSSG) of 4%, with a notable sequential improvement in traffic growth from -2.1% in 1Q24 to 0.8% [3] - Management indicated that SSSG strength continued into 3Q24 at 4.1%, driven by positive traffic growth across all regions [3] - The company plans to increase marketing spend to enhance brand awareness, currently spending about 1% of revenue compared to peers' 3-6% [3] Margin Expansion - The outlook for RLM is positive, with expectations of decreasing labor costs due to easing wage inflation and a new labor deployment model [4] - Food and paper cost inflation is projected to decline from 1.5% in 1Q24 to 0.5% in 2Q24, contributing to margin expansion [4] - Fixed cost leverage from mid-teen revenue growth is expected to further enhance profit margins [4] Financial Projections - Revenue is anticipated to grow at a mid-teen percentage for the next two years, supported by same-store sales and new store openings [8] - Adjusted EBITDA is expected to reach approximately $250 million in FY26, with an adjusted EBITDA margin projected at 15% [8] - The stock is expected to trade at 23x forward EBITDA, reflecting a stable valuation compared to peers [8] Conclusion - The overall growth outlook for Shake Shack remains solid, with 2Q24 performance demonstrating resilience in a challenging macro environment [10] - The combination of mid-teen revenue growth, new store openings, and expanding profit margins positions the company favorably for future performance [10]