Shake Shack, the Danny Meyer-led gourmet burger chain, filed to go public last week with the intention of raising $100 million to support its growth efforts.
Anticipation for the Shake Shack IPO had been building since rumors first began spreading in September that the chain was looking to enter the public markets. Though its footprint is relatively small with just 63 restaurants worldwide, Shake Shack's reputation precedes itself, thanks to its numerous accolades, passionate fan following, and Founder Danny Meyer's sterling reputation. The company even lists its outsized brand awareness as one of its primary assets in its prospectus. Let's take a look at some other key takeaways from the S-1 filing.
1. Average unit volumes are insane
As of 2013, Shake Shack's average unit volume, or the average sales for individual locations, for its 31 domestic company-owned restaurants was $5 million. That figure simply crushes the industry. By comparison, Chick-Fil-A has the highest average unit volume of major domestic quick service restaurants with $2.85 million. McDonald's is not far behind at $2.5 million, and growth star Chipotle is at $2.17 million. Generally, anything above $2 million is considered impressive. Of the top 50 fast-food chains, the median AUV is just $1.13 million.
Source: Company's website.
2. International sales have also been strongThe average unit volume figure says a lot about Shake Shack's success. Those giant sales numbers owe not just to the brand's popularity but also to its site selection as it's carefully opened up in high foot-traffic areas such as New York's Theater District and London's Covent Garden. Shake Shack was started in Manhattan, and the brand's performance has been particularly strong in its home market with AUV's of $7.4 million, compared to $3.8 million outside of Manhattan. While that may make Shake Shack locations look underwhelming outside of New York, remember that those volumes are still well ahead of industry leader Chick-Fil-A. As it expands, Shake Shack will have to seek fertile ground outside of New York, but it's still forecasting healthy sales, with a target range of $2.8 to $3.2 million and restaurant-level operating margins of 18% to 22%.
While the vast majority of Shake Shack's revenue comes from its domestic company-owned restaurants, international expansion is also an opportunity. The chain already has 27 licensed restaurants outside of the U.S., and notes that, burgers, "as the quintessential American meal have also proven to be the most portable concept internationally, with an estimated global market size of over $135 billion." That may give the burger chain an advantage over rivals such as Chipotle, which has had mixed success trying to introduce its fare to European palates.
Like domestic Shake Shacks, international average unit volumes have also been exceptional at $6.1 million. The majority of its restaurants abroad are located in the Middle East where the company has 20 outlets, and its 27 international locations generated $3.5 million in licensing fees in 2013, or about $130,000 per restaurant, most of which goes straight to the bottom line. Looking ahead, Shake Shack plans to expand further in the eight foreign countries in which it already operates, and expects to enter new international markets, underscoring the low-cost, high-return nature of licensing the brand.
3. Profits are still slim
Despite the strong average sales volumes for Shake Shack, profits are still small. Part of the reason is that the chain is still young with just 63 locations, only 31 of which are company-owned, but also overall margins are narrower than one might expect. In 2013, the company brought in $82.5 million in a revenue with a profit of $5.4 million, giving it a profit margin of 6.5%. However, for the first nine months of 2014, its profit margin fell to 4.1% as the company made a profit of just $3.5 million on similar revenue.
Restaurant-operating level margins are strong but also fell during the first nine months of 2014 from 27.2% to 24.7% due to increased labor and other operating expenses, though this may be explained by the high number of store openings in 2014 as the company grew its store count by more than 50% last year.
Going forward, Shake Shack expects restaurant-level operating margins at new locations to be more modest, at 18% to 22%, since the chain will be entering new markets where its brand is not as strong as it is in Manhattan. Management believes it can open at least 450 domestic company-owned stores, nearly 15 times what currently exists, but the potential could be much greater considering that a number of fast-food chains have well over 1,000 locations nationwide. Still, don't expect Shake Shack to blanket the country anytime soon as it says it expects to open at least 10 locations a year -- a modest pace. With its huge average unit volumes, Shake Shack has proven its popularity. Now it just needs to execute on its growth plan.
What to expect when the stock goes public
Restaurant IPO's have been flying off the shelves recently. The Habit Restaurants, another better burger chain, jumped out of the gates with shares more than doubling during its November debut. El Pollo Loco shares also more than doubled in its first two trading days last July, but shares of both stocks, along with many other recent restaurant IPOs, have fallen since jumping on their debuts.
With its well-known brand name, acclaimed management team, and monster average unit sales, Shake Shack may be a different animal. Shares have not been priced yet so we can't make any valuation calculations, but I'd expect a buying binge on opening day based on the company's reputation and the recent history of restaurant IPO's.
Will Shake Shack be the hottest IPO of 2015? It may be too early to make that call as we could also see big-name companies like Uber and Airbnb go public, but one thing is for sure. The Shake Shack offering is set to make mouths water on both Wall Street and Main Street.
