Shake Shack (NYSE:SHAK) is the fine-casual burger chain from restaurant impresario Danny Meyer. As of May 5, 2015, it consisted of 68 Shacks total, 36 of which are company-owned and operated. Even after a recent 30% drop in stock price, the valuation per store remains steep. With a current market cap of over $2.2 billion, the company is valued at over $32 million per store and at nearly $64 million per company-owned store. It is looking to grow at around 10 new domestic company-owned stores per year toward a domestic goal of 450.
While many would be scared away by valuations this steep, I would still invest alongside Meyer and his chosen CEO Randy Garruti. Meyer is among the best managers in America. He has done very well for his investors by, perhaps paradoxically, not prioritizing them.
"Enlightened hospitality" as the blueprint for success
Meyer's Setting the Table: The Transforming Power of Hospitality in Business is one of the best business books that I've ever read. If you are in any hospitality profession it is a must-read and its lessons are applicable to nearly any business. Meyer outlines the list of his priorities when running a restaurant, which in his portfolio range from fine dining to pizza to BBQ to the roadside burger shack. The principles remain intact regardless of the external trappings of the restaurant. He focuses first on his employees, then customers, then suppliers, then the community, and finally on the investors. This belief system and what Meyer calls "enlightened hospitality" may make investors quiver, but by focusing on the other four constituencies first, the profits invariably flow to investors in the end.
This focus may present short-term burdens on the company
Shake Shack has been paying above minimum wage, starting at $10 an hour in NYC, since its inception. This has certainly crimped short-term profitability, but I think it's fair to say that going to Shake Shack is a much more pleasant experience than going to one of the monolithic burger chains. A lot of this has to do with happier, more-empowered, better-compensated employees. There's also the use of quality meat raised with with no hormones and no antibiotics, which surely costs more than the alternative, but attracts customers. These investments in people and product as well as relationships with suppliers and the community seem to pay off in the long term.
"We honestly thought we'd sell a couple hot dogs."
CEO Randy Garutti said the above when the stock IPO'd in January 2015, going on to say that "Shake Shack was born as a humble hot dog cart to raise money for a park."
This is the story behind the accidental creation of what is now a multibillion-dollar burger empire and one of the main reasons why it will continue to succeed. Meyer has had a long and fruitful relationship with the area near Madison Square Park in New York City and was trying to support the community where many of his restaurants are located. While they have greatly outgrown this original hot dog stand in the park, management still has the same singular focus on their process. In the words of Garutti, "we're acting today exactly how we acted [for] that first Chicago-style hot dog. We're doing one hot dog, one burger at a time." By focusing on the business, over the long run, the stock will take care of itself.
Weekly sales are great and revenue growth remains robust
Shake Shack company owned domestic stores delivered weekly sales of $89,000 per store in the first quarter of 2015. For comparison Chipotle, another excellent company, racks up about $2.5 million per store in annual sales, or about $48,000 per week. Admittedly this is over a much larger and more diversely located base of locations. In 2014 Shake Shack had revenue of $119 million and the company estimates 2015 revenue to come in between $161 and $165 million. On the low end that's revenue growth of over 35%. Chipotle's average 10 year revenue growth is 24.19%.
This is a very long-term investment and not for the faint of heart
Shake Shack's stock price could easily drop 50% or more in the short term and it would not surprise me if it did so. The company still has a very small footprint, is being valued on very lofty expectations, and is in the crowded burger market. Nevertheless, if it can reasonably approximate its weekly sales numbers while protecting its culture as it builds out toward 450 stores I think this will be a long-term market-beating stock. There is no one in the restaurant space who I feel is more suited to guide the company successfully on this journey than Danny Meyer and his handpicked CEO, Randy Garutti.
James Sullivan owns shares of Apple, Chipotle Mexican Grill, and Shake Shack. The Motley Fool recommends Apple and Chipotle Mexican Grill. The Motley Fool owns shares of Apple and Chipotle Mexican Grill. 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.