Accelerated Expansion And Innovation To Boost Revenue And Strengthen Community Engagement

Key Takeaways

• Strategic expansion and operational enhancements are set to boost revenue, with drive-thrus and quick service improving guest satisfaction and potentially expanding margins.
  
• Initiatives like menu innovation and a new loyalty platform aim to increase customer engagement and same-store sales, driving future sales growth.
  
• Site selection challenges, geopolitical uncertainties, and inflation pressure Shake Shack's growth prospects and revenue consistency.

Catalysts

Owns, operates, and licenses Shake Shack restaurants (Shacks) in the United States and internationally.

• Shake Shack plans to accelerate new unit openings in 2025, with 80 to 85 openings expected. This increased expansion, particularly with drive-thrus and licensed Shacks, could significantly boost revenue.
  
• The company is on track to reduce build costs by approximately 10% in 2024, leading to improved profitability and potentially higher net margins for future new units.
  
• Shake Shack's strategic product innovation calendar aims to enhance its menu offerings, which could drive higher same-store sales and increase overall revenue.
  
• The development and launch of a Shake Shack loyalty platform in 2025 are anticipated to strengthen customer engagement and repeat visits, positively impacting future sales and earnings.
  
• Operational enhancements, including decreased service times and improved throughput, are expected to increase guest satisfaction, leading to higher sales and potentially expanding net margins.

Shake Shack Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Shake Shack's revenue will grow by 13.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.7% today to 4.6% in 3 years time.
• Analysts expect earnings to reach $83.0 million (and earnings per share of $1.85) by about November 2027, up from $8.7 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 86.7x on those 2027 earnings, down from 546.7x today. This future PE is greater than the current PE for the US Hospitality industry at 24.4x.
• Analysts expect the number of shares outstanding to grow by 1.82% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.66%, as per the Simply Wall St company report.

Shake Shack Future Earnings Per Share Growth

Risks

• The company closed 9 Shake Shacks that were generating $17 million in sales, indicating underperforming locations, which could impact overall revenue and point to potential challenges in site selection and market penetration.
  
• There is significant macroeconomic and geopolitical uncertainty in key international markets like China and the Middle East, which could negatively affect future revenue and expansion plans.
  
• Ongoing inflationary pressures, especially related to beef costs, pose a risk to margins, as Shake Shack might have to increase prices further, potentially affecting customer demand and overall earnings.
  
• The restaurant closed lower-performing locations, which while improving margins, can also signal vulnerability in sustaining profitable growth across all locations, thereby impacting revenue consistency.
  
• Shake Shack has delayed opening some licensed locations, reflecting potential operational or strategic challenges that could affect the company's top-line growth projections.

Valuation

• The analysts have a consensus price target of $131.14 for Shake Shack based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $160.0, and the most bearish reporting a price target of just $102.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.8 billion, earnings will come to $83.0 million, and it would be trading on a PE ratio of 86.7x, assuming you use a discount rate of 7.7%.
• Given the current share price of $119.09, the analyst's price target of $131.14 is 9.2% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.