When I predicted things would get rough for Shake Shack (SHAK 5.41%) in the first quarter of 2020, a pandemic-fueled economic crisis is hardly what I had in mind. Nevertheless, after opening 73 new stores last year (ending 2019 with 275 total), entering new markets in major U.S. cities, introducing new menu item hits like Chick'n Bites, and outlining plans for as many as 77 more Shack openings in 2020, the better-burger chain has found itself navigating a life-or-death situation.
The economic lockdown to combat coronavirus is only just beginning to ease in the U.S., and plenty of question marks remain. But Shake Shack's enduring popularity, quick adaptation to predominantly digital and to-go ordering, and fresh cash infusion has it in pretty good shape -- considering the situation.
A whole crisis in a microcosm
In a matter of two months, Shake Shack went from high-flying restaurant upstart to being on the brink of insolvency to entering the recovery phase. Not only have the response efforts to fight COVID-19 created the biggest crisis for service industries (like restaurants) in modern history, it's looking like there's a chance that the worst is already in the past -- leaving companies like Shake Shack able to pick up the pieces and go about a recovery in record time.
Of course, a lot could change again. But on its first-quarter 2020 business update, management reported steadily recovering sales after a low 73% year-over-year decline in comparable-store sales (a combination of foot traffic and guest order size) the week ending March 25. By the week ending April 29, average comparable store sales were down "only" 45%.
It's an ugly read on an important metric, but it also demonstrates how quickly Shake Shack is rallying. The recovery is fully centered on Shack's digital app for order ahead, curbside pickup, and delivery. In fact, 80% of sales at the end of April were through a digital channel. Cook-at-home meal kits have also been developed, a strategy recently employed by other chains like Texas Roadhouse.
Doubling down on the "Shack" in Shake Shack
Shake Shack describes itself as a modern-day "roadside" burger stand. Whether it has actually met that definition during its expansion in the last five years since its debut as a public stock is up for debate. Most stores look like a high-end fast-casual diner, rather than a "shack" on the side of a road. However, post-coronavirus, becoming more of a "roadside-style" establishment is looking likely.
Taking what it's learned from the crisis, a new Shack Track store model has been developed that will include dedicated areas for pick-up and a drive-thru. Existing locations are also in line for some architectural modifications. Besides preparing for the "new normal" once the pandemic has passed, encouraging digital ordering and better flow in and out of its stores is a smart move. The typical Shake Shack isn't very big, and yet the company had one of the highest per-store annual sales averages at over $3.7 million -- up there with Chick-fil-A and its bustling restaurants.
Finding ways to make its busiest Shacks more efficient has been a challenge in the last couple of years, and Shack Track could be the key. It remains to be seen when the new store development engine fires back up, but when it does the management team has a plan of attack that makes sense for the new world that is likely to emerge post-coronavirus. And most importantly, Shake Shack has the liquidity to execute.
In the years leading up to this crisis, many restaurants had been aggressively expanding at an increasingly lower rate of profitability. There simply were too many restaurants opening for consumers to fill them up. Shake Shack was most certainly part of that arms race. However, while many companies expanded via debt, not so with Shake Shack. The company entered 2020 with no outstanding long-term liabilities, giving it the ability to comfortably draw down $50 million from its revolving credit facility in late March. It sold additional stock in April for another $150 million in cash proceeds.
Currently in cash preservation mode, management reported it had $247 million in cash and equivalents at the time of the first quarter 2020 report and only the $50 million in revolving credit as debt on the books. Weekly cash burn had been reduced to $800,000 at the onset of May. It's not a sustainable long-term situation, but suffice it to say it gives Shake Shack plenty of room to maneuver the crisis and resume its growth (with a new slant toward digital and to-go sales) once the dust settles.
While it's certainly not out of the woods yet, Shake Shack's position at the moment is nonetheless an enviable one for the bludgeoned restaurant industry. With shares now half what they were trading for in September 2019, I've started nibbling on the stock and plan to purchase some more in the weeks ahead.