The gold rush finds Shake Shack (NYSE:SHAK) setting its sights on California. The market darling among gourmet burger chains announced on Tuesday that it will be opening its first location in the country's most populous state.
When Shake Shack sets up camp in West Hollywood -- on the corner of Santa Monica Boulevard and West Knoll Drive -- it won't just be serving up Angus burgers, crinkle-cut fries, and frozen custard concoctions. Shake Shack will also be trying to reshape California convictions as it takes on West Coast fave In-N-Out.
This won't be the first time that Shake Shack elbows its way into In-N-Out's turf. The New York-based chain opened in Las Vegas -- inside the New York New York resort, fittingly enough -- four months ago, placing it within a mile of one of In-N-Out's outlets in Sin City.
As beloved as Shake Shack may be in its existing markets, it's not as if California will welcome it with open arms. Dunkin' Donuts was an even bigger East Coast juggernaut when it initially tried to give it a go in California. It didn't go well. Dunkin' Brands (NASDAQ:DNKN) had a handful of franchised stores in the Golden State before they closed down in the late 1990s. A return on a much smaller scale in Sacramento in 2002 also fizzled out. The third time may be the charm. Dunkin' Brands took a "going back to Cali" gamble late last year, and it may finally stick around this time.
Shaking things up
Shake Shack has been on fire since going public at $21 just three months ago. The stock has gone on to nearly triple. The market's excited about the momentum and expansion upside. Shake Shack may have kicked off the year with 63 units, but 27 of those are licensed locations overseas. That leaves 31 company-owned locations and another five domestic franchised units. At least 10 new domestic company-owned restaurants will open this year, and that will really move the needle as the number of Shake Shack-owned eateries grows by at least 32%.
Sales are on a tear, soaring 44% to $118.5 million last year. Most of that growth has been the handiwork of expansion. Comps were up a respectable 4.1% for the entire year, but sales and comps growth accelerated during the holiday quarter.
There are legitimate valuation concerns. With more than 36 million shares outstanding between the two classes of stock since January's IPO, we're looking at a market cap of $2.2 billion. Many online sources are understating the actual number of shares outstanding, but that will become clear after Shake Shack reports quarterly results in a few weeks.
Shake Shack is marginally profitable at this point in the chain's life cycle, and you won't find too many restaurants trading at 18 times trailing sales. However with years -- and likely decades -- of markets to conquer, $2.2 billion may seem cheap several years from now. For now Shake Shack has to make sure that it can prove itself worthy of California. It's not an easy market to crack, but with momentum and a hot IPO making it a darling for diners and investors alike, you have to like its chances.
Rick Munarriz has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.