Shake Shack's (NYSE:SHAK) roots trace back to a single hot dog cart supporting the redevelopment of Madison Square Park in Manhattan in 2001. Now, over a decade later, it has transformed into a "modern day 'roadside' burger stand" with more than 80 restaurants in half a dozen countries.
In that time frame, the fast-casual niche of better burger shops has exploded. With The Habit (NASDAQ:HABT), Smashburger, and In-N-Out Burger all vying for attention and providing a counterbalance to the ubiquity of McDonald's, we tap three Motley Fool contributors who break out their crystal ball to peer into the future and give us their insight into what the next 10 years may bring.
Jeremy Bowman: Shake Shack has already given us a few hints about where it's headed. The company told investors last year it aims to open at least 14 domestic-company owned restaurants annually as it works toward its goal of 450 domestic company-owned locations.
That pace would give the burger chain about 200 company-owned restaurants by 2026, and last year, Shake Shack's individual restaurants delivered an operating profit of about $1.4 million. Assuming that level holds, we could expect $280 million in operating profit from Shake Shack's domestic company-owned segment in 2026.
Internationally, the high-end burger chain hasn't provided as much color about its expansion goals, but it seems likely its current efforts will continue at least at the current pace, which is eight new international restaurants expected this year. That would more than triple the total international restaurant count to 115, providing about $24 million in licensing revenue.
Based on a conservative estimate at today's profit margins, that would only provide a net income of $40 million, which hardly makes the stock compelling at a current market cap above $1 billion.
However, the company's profitability is likely to improve as it grows. Traffic and prices will move higher, boosting sales and profits, G&A expenses will come down as a percentage of revenue as it grows, and the company could accelerate its expansion, as it has already done twice in its short history as publicly traded entity.
I expect Shake Shack's brand to remain strong as the company's formula of high-traffic locations, top-notch management, and much-loved food has delivered blockbuster average unit volumes. But in order to make the stock compelling, Shake Shack will have to improve on its current margins and growth rate. If the company expands to, say, 300 restaurants by 2026 with a $2 million operating profit per restaurant, all while controlling corporate expenses, net income could be in the $200 million range. Profits like that would make the stock a big winner over the next decade.
Daniel B. Kline: For years, the part of Connecticut where I lived saw national television ads for a certain drive-up chain that serves ice cream, slushies, burgers, and more. The persistent commercials made the brand seem special, and it was ultimately a letdown when the company finally opened locations in our area.
It's not that it's bad, it's just that the buildup was too big for what the company actually delivers. In the case of Shake Shack, that's not entirely the case. The chain does have a high-quality product that mostly meets the hype preceding it, but the burger joint does benefit from scarcity, and the idea that visiting constitutes more of an event rather than just a meal.
This creates a bit of a conundrum for Shake Shack. If the company expands to every street corner, like some of its rivals, then it becomes less special. That leaves it room to expand, but it curtails overall growth.
Ideally, Shake Shack will expand to more markets, but limit its presence in each locale. Forcing people to travel keeps the brand special and builds hype, which causes more people to take the trip. That can lead to bigger sales per visit while building the mystique around the brand. Overall, that may keep the number of units down, but it's a recipe for steady growth with healthy profits.
Rich Duprey: The market seems to have a "what have you done for me lately" attitude when it comes to Shake Shack, which beat analyst expectations in the fourth quarter but got hammered anyway because of a less-than-robust outlook.
Same-Shack sales were through the roof in 2015, but there were a lot of reasons unrelated to simply more business, like going public and getting a lot of positive media support. But comps have been on a downward slope since 2012, and beating the low point they hit the prior year wasn't too hard with the press it was getting. Also, price hikes made up just as much -- if not more -- of the growth than actual customer traffic increases did. It's going to be difficult to repeat that performance, which is why management has guided for dramatically lower comps in 2016.
Over the next decade, however, it also has to face the impact of market saturation and maturation for the better burger niche. While it has a fairly conservative growth plan for itself -- it sees some 450 Shake Shacks total in domestic markets -- the rest of the fast-casual burger industry has much more aggressive plans. The Habit, which operates 140 restaurants and plans to open another 60 this year, says the market can support 2,000 of its restaurants. Five Guys has 1,100 restaurants operating and 1,000 more in development. BurgerFuel wants to open 1,000 stores.
While Shake Shack's plans seem far more attainable, it risks getting lost in the wave of competition that will wash over the sector, and the better burger industry may never be more than a niche business in a much larger industry.
With its forward earnings valuation still anticipating IPO-year-like performances, Shake Shack's stock will undoubtedly come down more over time even if, over the next decade, as I suspect, the better burger joint remains a strong brand able to outlast others reaching for more.
Rich Duprey 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.