Burgers are big business. Estimates of the number of burgers eaten annually by Americans range from 9 billion up to 50 billion and the top 24 U.S. burger brands had sales of almost $80 billion in 2016.
The broad appeal and versatility of the burger -– with classic to gourmet options -- contribute to its staying power as an American go-to food. Its relative affordability and portability help, too.
But ubiquity has a downside. The U.S. has almost 650,000 restaurants, and more than 70% of the beef eaten in restaurants is in burger form. Standing out from the crowd and staying in the burger business is not for the faint of heart. Americans are awash in burger options. Want a thick patty or a double-patty option? It's available. Looking for a pounder or mini sliders? Both are on the menu. The best operators keep a pulse on burger trends, adapting to keep pace with demand.
Image source: Shake Shack.
Is Shake Shack a contender?
Shake Shack (SHAK 2.79%) -- which started as a hot dog cart in Madison Square Park in Manhattan, established its first permanent kiosk serving burgers and more in 2004, and went public in January 2015 -- has proven it knows how to fight in the burger wars. The leadership team, headed by CEO Randy Garutti, has landed the right mix of authentic quality ingredients, word-of-mouth marketing, and long-line exclusivity. First-quarter 2018 results would feed the biggest appetites.
- Total revenue grew 29.1% to $99.1 million.
- Same-Shack sales (comps) were up 1.7%, a bright spot compared to the year-ago quarter's 2.5% comps decline.
- Operating income increased 15.7% to $6.5 million, or 6.6% of total revenue.
- Net income was up 3.5%, reaching $3.5 million, or $0.13 per diluted share.
- Adjusted EBITDA increased 32.8% to $16.2 million.
The company, with 162 stores globally, is bullish with expansion plans. The team anticipates 48 to 53 new locations opening in 2018 to get closer to its goal of 200 U.S stores by 2020 and 450 globally long-term. Some of the first-quarter growth reflects nine new openings -- five in the U.S. and four internationally.
Investors climbed aboard the Shake Shack train, pushing the stock price up 18% the day after the earnings report was released in early May. Shares are up roughly 50% so far this year after rising about 20% in 2017.
Ambitious plans and challenges
While Shake Shack may continue to grow faster than some competitors, there could be bumps in the road. In a competitive space, new locations may not outperform the current footprint, which is key to boosting the company's organic growth trends.
Restaurants costs can be challenging to predict. Even with a good success rate and strong blueprint for openings, changes in ingredient costs and higher wages can affect planned performance.
- Although beef supply is currently stable, the demand for fresh beef is expected to put pressure on pricing. Shake Shack uses a proprietary blend of fresh ground beef for its burgers and may face increased costs. Importantly, fresh beef has been a key point of difference for Shake Shack, but competitors are jumping on the fresh beef bandwagon, putting more pressure on supply and Shake Shack's market share.
- The wage structure for quick-service restaurants in the U.S. is changing. This year saw 20 states increase minimum wages, resulting in some restaurants experiencing increased wage costs of more than 20%. Shake Shack pays employees above minimum wages in general but may see profit margins affected due to higher costs in new markets.
Shake Shack's value proposition remains solid and the leadership team instills confidence. But investors should be aware that there may be difficulty fully realizing gains from an ambitious expansion plan when the road ahead probably contains a few unpredictable potholes.
