Not surprisingly, Shake Shack (SHAK -0.76%) had a terrible outing in the second quarter. The springtime period -- the worst of the economic downturn due to efforts to stop the spread of coronavirus -- yielded a 40% year-over-year decline in revenue to $91.8 million. Same-Shack sales, which measures an average of foot traffic and average guest spending at stores open for at least two years, were down 49%, with the better-burger chain's concentration in New York City (where same-Shack sales were down 64% from last year) contributing significantly to the metric's downfall.
As a result, adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) swung to a loss of $8.8 million compared to a gain of $25.9 million a year ago. The numbers weren't pretty, but Shake Shack is making steady progress in most markets (not so much in New York City where same-Shack sales remained down 56% in July). The key to this restaurant making incremental progress will be its digital-selling capabilities and new to-go format. A fresh infusion of cash should also help.
Hanging on to digital sales
As bad as things look right now for Shake Shack, it would have been far worse if not for its digital capabilities. The company said it picked up 800,000 first-time customers via its app and website since the beginning of March, and digital sales made up 75% of the grand total in Q2, tripling from the same quarter in 2019.
With so many confined to their homes in the spring, it's no surprise that digital channels made up such a large percentage. But as stores have begun to reopen, management said it has held on to 90% of its new digital business in the month of July. It's obviously still very early on in the economic recovery, and with COVID-19 still running amok out there, some of this internet-based consumer behavior could eventually backtrack.
But this restaurant outfit isn't waiting idly to find out. Much like Starbucks (SBUX 0.09%), it's rolling out updates to its technology that will include the ability to request delivery in-app, added pick-up and payment functionality, and budgeted for app marketing and customer targeting. It's looking increasingly likely that consumers like digital features added to their dining-out experience, and Shack needs to make these changes to stay relevant.
Making the pivot to on-the-go could get expensive
But this is about more than just having an app and partnering with food delivery companies. Also like Starbucks, Shake Shack is planning changes to the actual makeup of its real estate to accommodate the shift in behavior that is shaping up. Of the more than 280 Shacks located here in the states, eight are expected to receive a "Shack Track" facelift this year, which includes a drive-up window, space for curbside pickup, and a walk-up window for those on foot. And the first newly designed drive-thru store concept will debut in 2021.
A total of 15 to 20 domestic stores will be opened by the end of the year, and management believes "additional and improved development opportunities may be available over time due to the impact of COVID-19 on the overall retail and real estate environment." Read: Commercial property owners are hurting and will be willing to cut deals. It remains to be seen how aggressive Shake Shack gets in its expansion plans as the economy begins to normalize again, but its push westward could pick up steam if the to-go formatting catches on and real estate deals can be had.
To that end, Shake Shack's cash will come in handy to help it bridge the gap now while it tries to find its footing, and as it develops new properties. Cash, equivalents, and marketable securities totaled $191 million at the end of June, and the revolving credit line of $50 million was paid off during Q2, leaving no debt remaining. Fresh liquidity was raised through the sale of over 3.6 million new shares, netting Shack nearly $146 million in funding. The move dilutes existing shareholders, but as the company has a market cap of $2 billion as of this writing, not excessively so.
Now isn't a particularly exciting time to invest in restaurant stocks. To be sure, there are risks as this burger chain resumes its aggressive growth. Nevertheless, it would appear the future will favor digital and to-go, and Shake Shack is making the pivot to accommodate. With its cash position stronger than ever before, this stock is at least worth considering for those investors looking for a high-risk but potential high-reward play on the restaurant industry.