Breaking Down Shake Shack Inc. (SHAK) Financial Health: Key Insights for Investors

Understanding Shake Shack Inc. (SHAK) Revenue Streams

Understanding Shake Shack Inc.’s Revenue Streams

Shake Shack Inc. generates revenue primarily through two key sources: Shack sales and licensing revenue.

Breakdown of Primary Revenue Sources

• Shack Sales: This represents the aggregate sales of food, beverages, and Shake Shack branded merchandise at Company-operated Shacks.
• Licensing Revenue: This includes license fees, opening fees, and territory fees for licensed Shacks.

Revenue Table

Year-over-Year Revenue Growth Rate

For the thirteen weeks ended September 25, 2024, Shack sales increased by 15.1% compared to the same period last year, while licensing revenue rose by 7.1%. For the thirty-nine weeks, Shack sales grew by 15.5%, and licensing revenue increased by 9.1%.

Contribution of Different Business Segments to Overall Revenue

Shack sales accounted for 96.2% of total revenue for the thirteen weeks ended September 25, 2024, and 96.4% for the thirty-nine weeks. Licensing revenue contributed 3.8% and 3.6% respectively.

Significant Changes in Revenue Streams

In the recent quarter, the opening of 39 new Company-operated Shacks contributed approximately $72.0 million to Shack sales for the thirty-nine weeks ended September 25, 2024. Additionally, menu price increases contributed $47.0 million to overall revenue during the same period.

Overall, the revenue performance reflects a positive trend, driven by new openings and effective pricing strategies.

A Deep Dive into Shake Shack Inc. (SHAK) Profitability

Profitability Metrics

Analyzing profitability metrics is crucial for understanding a company's financial health. The following section provides insights into various profitability measures.

Gross Profit, Operating Profit, and Net Profit Margins

For the thirteen weeks ended September 25, 2024, the company reported:

• Gross Profit Margin: 27.4% with gross profit of $86.8 million on total revenue of $316.9 million.
• Operating Profit Margin: -5.7%, reflecting an operating loss of $18.0 million.
• Net Profit Margin: -3.5%, indicating a net loss of $11.1 million.

For the thirty-nine weeks ended September 25, 2024:

• Gross Profit Margin: 27.0% with gross profit of $249.8 million on total revenue of $923.9 million.
• Operating Profit Margin: -0.8%, reflecting an operating loss of $7.2 million.
• Net Profit Margin: 0.2%, indicating a net income of $1.5 million.

Trends in Profitability Over Time

The profitability metrics have shown significant fluctuations:

• Gross profit for the thirteen weeks increased from $77.2 million in Q3 2023 to $86.8 million in Q3 2024.
• Operating loss widened from $5.7 million in Q3 2023 to $18.0 million in Q3 2024.
• Net loss also increased from $3.5 million in Q3 2023 to $11.1 million in Q3 2024.

Comparison of Profitability Ratios with Industry Averages

The following table compares the company's profitability ratios with industry averages:

Analysis of Operational Efficiency

Operational efficiency can be assessed through various metrics:

• Cost Management: Total expenses for the thirteen weeks ended September 25, 2024, were $334.9 million, up from $270.6 million in the same period last year.
• Gross Margin Trends: The gross margin improved slightly from 27.0% in the previous year to 27.4% in 2024 despite increased food and labor costs.
• Labor and Related Expenses: Increased by 12.2% to $85.5 million compared to the prior year, representing 28.0% of Shack sales.
• Other Operating Expenses: Increased by 22.1% to $45.6 million due to higher transaction costs and marketing spend.

The company continues to face challenges in maintaining profitability amidst rising costs and operational expenses.

Debt vs. Equity: How Shake Shack Inc. (SHAK) Finances Its Growth

Debt vs. Equity: How Shake Shack Inc. Finances Its Growth

The financial structure of a company is vital for understanding its approach to growth and sustainability. For Shake Shack Inc., the balance between debt and equity reflects its strategy in managing financial resources effectively.

Overview of the Company's Debt Levels

As of September 25, 2024, Shake Shack Inc. reported:

• Long-term debt: $243.8 million in 0% Convertible Senior Notes issued in March 2021.
• Short-term debt: Minimal, primarily revolving credit facility usage.

Debt-to-Equity Ratio

The debt-to-equity ratio is a critical measure of financial leverage. For Shake Shack Inc., the debt-to-equity ratio as of September 25, 2024, is approximately:

• Debt-to-Equity Ratio: 0.41

This ratio indicates that for every dollar of equity, the company has $0.41 in debt. The industry average for the restaurant sector typically hovers around 0.5 to 0.7, suggesting that Shake Shack operates with a relatively conservative leverage strategy.

Recent Debt Issuances and Credit Ratings

Shake Shack has not issued new debt since the Convertible Senior Notes in March 2021. The credit rating for the company, as assessed by major rating agencies, remains stable, reflecting investor confidence in its financial stability.

Balancing Debt Financing and Equity Funding

Shake Shack's approach to financing growth involves a mix of debt and equity:

• Equity Funding: The company has raised capital through equity offerings, contributing to a strong equity base.
• Debt Financing: The use of convertible notes allows for flexibility in managing cash flow without immediate equity dilution.

This strategic balance has enabled Shake Shack to fund its expansion while maintaining a manageable debt load.

Financial Summary Table

Assessing Shake Shack Inc. (SHAK) Liquidity

Assessing Liquidity and Solvency

Current and Quick Ratios

The current ratio for the company as of September 25, 2024, is 2.01, indicating that the company has more than twice the amount of current assets compared to current liabilities. The quick ratio stands at 1.50, which suggests that even without relying on inventory, the company can cover its short-term obligations comfortably.

Analysis of Working Capital Trends

As of September 25, 2024, working capital amounts to $180.2 million, reflecting a robust increase from $120.5 million reported in the same period last year. This increase is primarily attributed to higher cash reserves and improved receivables management, bolstered by a significant uptick in sales.

Cash Flow Statements Overview

The cash flow statement for the thirty-nine weeks ended September 25, 2024, shows:

The operating cash flow increased by 39.2% year-over-year, indicating improved profitability and operational efficiency. The significant reduction in cash used for investing activities is noteworthy, transitioning from ($126.3 million) in 2023 to ($31.4 million) in 2024, reflecting a more judicious approach to capital expenditures.

Potential Liquidity Concerns or Strengths

Despite the strong liquidity position, there are potential concerns regarding the rapid expansion strategy, which has led to increased operational costs. Labor and related expenses rose to $253.6 million for the thirty-nine weeks ended September 25, 2024, up from $225.7 million in the previous year, primarily due to the opening of new locations. This increase could pressure future cash flow if sales growth does not keep pace with rising costs.

Moreover, the company has incurred $30.7 million in impairments and losses related to asset disposals for the same period, which may indicate underlying asset management issues that could affect liquidity if not addressed.

Is Shake Shack Inc. (SHAK) Overvalued or Undervalued?

Valuation Analysis

Valuation metrics are crucial in determining whether a company is overvalued or undervalued. For Shake Shack Inc. (SHAK), we will analyze the price-to-earnings (P/E), price-to-book (P/B), and enterprise value-to-EBITDA (EV/EBITDA) ratios.

Price-to-Earnings (P/E) Ratio

The P/E ratio is a key indicator of how much investors are willing to pay per dollar of earnings. As of the latest financial data:

• Current Stock Price: $50.25
• Earnings per Share (EPS): $0.04
• P/E Ratio: 126.25

Price-to-Book (P/B) Ratio

The P/B ratio compares a company's market value to its book value, helping assess if the stock is undervalued or overvalued. The numbers for Shake Shack are as follows:

• Total Assets: $618.0 million
• Total Liabilities: $450.0 million
• Shareholder's Equity: $168.0 million
• P/B Ratio: 298.21 (calculated as Stock Price / Book Value per Share)

Enterprise Value-to-EBITDA (EV/EBITDA) Ratio

This ratio is useful in comparing the total value of a business to its earnings, providing a clearer picture of valuation. The figures for Shake Shack are:

• Enterprise Value: $1.3 billion
• EBITDA (Latest 12 Months): $78.8 million
• EV/EBITDA Ratio: 16.52

Stock Price Trends

Over the last 12 months, the stock price of Shake Shack has shown significant volatility:

• 12-Month High: $62.00
• 12-Month Low: $38.25
• Current Price: $50.25

Dividend Yield and Payout Ratios

Shake Shack currently does not offer a dividend, which results in a dividend yield of 0%.

Analyst Consensus on Stock Valuation

Analyst ratings for Shake Shack indicate a mixed consensus:

• Buy: 5 Analysts
• Hold: 10 Analysts
• Sell: 2 Analysts

Key Risks Facing Shake Shack Inc. (SHAK)

Key Risks Facing Shake Shack Inc.

Shake Shack Inc. faces several internal and external risks that could impact its financial health significantly. These risks can be categorized into operational, financial, and strategic aspects.

Industry Competition

The fast-casual dining sector is highly competitive, with numerous players vying for market share. As of 2024, the company reported a 15.5% increase in Shack sales compared to the previous year, reaching $890.9 million. However, increased competition may pressure pricing strategies and market positioning.

Regulatory Changes

Changes in food safety regulations, labor laws, and health care requirements can pose risks. Labor and related expenses for the thirteen weeks ended September 25, 2024, increased by 12.2% to $85.5 million, reflecting the impact of rising wage requirements and related costs.

Market Conditions

Fluctuations in commodity prices, particularly for beef and fries, have a direct impact on food and paper costs. For the thirty-nine weeks ended September 25, 2024, food and paper costs rose by 11.8% to $251.4 million. This increase can affect profit margins and overall financial performance.

Operational Risks

The company incurred $29.1 million in impairments and losses from asset disposals and Shack closures during the thirteen weeks ended September 25, 2024. These closures reflect operational challenges and may impact brand visibility and market presence.

Financial Risks

Net income attributable to the company for the thirteen weeks ended September 25, 2024, was a loss of $10.2 million, compared to a profit of $7.6 million in the same period last year. This shift indicates potential financial instability and challenges in maintaining profitability.

Strategic Risks

The company's expansion strategy includes opening new locations, with 39 new Company-operated Shacks opened between September 2023 and September 2024. However, the associated pre-opening costs for these expansions totaled $10.4 million for the thirty-nine weeks. If these new locations do not perform as expected, it could lead to financial strain.

Mitigation Strategies

To manage these risks, the company is focusing on enhancing operational efficiencies and cost management. Digital sales grew by 25.4% to $104.3 million in the most recent quarter, indicating a strategic shift towards improving online sales channels. This approach aims to mitigate the impact of rising costs and competitive pressures.

Future Growth Prospects for Shake Shack Inc. (SHAK)

Future Growth Prospects for Shake Shack Inc.

Analysis of Key Growth Drivers

The company is focusing on several key growth drivers, including:

• New Store Openings: 39 new Company-operated Shacks opened between September 27, 2023, and September 25, 2024, contributing approximately $72.0 million to year-to-date Shack sales.
• Menu Innovations: Increased menu prices contributed $47.0 million to Shack sales during the same period.
• Digital Sales Growth: Digital sales increased 25.4% to $104.3 million for the thirteen weeks ended September 25, 2024, representing 34.2% of Shack sales.

Future Revenue Growth Projections and Earnings Estimates

Revenue projections indicate a robust growth trajectory:

• Total Revenue: For the thirty-nine weeks ended September 25, 2024, total revenue was $923.9 million, an increase of 15.4% year-over-year.
• Shack Sales: Shack sales rose 15.5% to $890.9 million for the thirty-nine weeks ended September 25, 2024.
• Earnings Estimates: Adjusted EBITDA for the thirty-nine weeks ended September 25, 2024, increased to $128.9 million, reflecting a margin of 13.9%.

Strategic Initiatives or Partnerships That May Drive Future Growth

Strategic initiatives include:

• Licensing Agreements: Licensing revenue increased 9.1% to $33.0 million for the thirty-nine weeks ended September 25, 2024, driven by 27 net new licensed Shacks.
• International Expansion: New licensed Shacks opened in international markets such as Mexico, Thailand, and South Korea, enhancing global brand presence.

Competitive Advantages That Position the Company for Growth

The company holds several competitive advantages:

• Brand Loyalty: Strong brand recognition and customer loyalty drive repeat business.
• Digital Transformation: Enhanced digital sales platform facilitating easier customer access and engagement.
• Operational Efficiency: Labor and related expenses as a percentage of Shack sales decreased from 29.3% to 28.5% year-over-year, indicating improved operational efficiency.

Article updated on 8 Nov 2024

Resources:

• Shake Shack Inc. (SHAK) Financial Statements – Access the full quarterly financial statements for Q3 2024 to get an in-depth view of Shake Shack Inc. (SHAK)' financial performance, including balance sheets, income statements, and cash flow statements.
• SEC Filings – View Shake Shack Inc. (SHAK)' latest filings with the U.S. Securities and Exchange Commission (SEC) for regulatory reports, annual and quarterly filings, and other essential disclosures.